Wednesday, June 11, 2014
Although the health savings account (HSA) has traditionally been intended to function as a savings account for medical expenses, it can actually function as a powerful retirement income planning vehicle for clients looking to supplement their retirement savings.
HSA funds are withdrawn tax-free if they are used to cover medical expenses, so clients can maximize the tax-preferred treatment of the HSA if the funds are eventually spent on qualified medical expenses. However, there is no requirement HSA funds be withdrawn for this purpose. Upon reaching age sixty-five, the client can withdraw the funds for any purpose without penalty. The income will be taxable as ordinary income, just as funds withdrawn from a traditional IRA are taxed. Yet it is important for clients to understand funds withdrawn to cover nonmedical expenses before the client reaches age sixty-five are subject to a 20% penalty in addition to the ordinary income tax rate that otherwise applies.
Since unused finds in the HSA do not expire, a client’s annual contributions can be left to grow on a tax-deferred basis. Thus, many clients can accumulate substantial account balances that will supplement traditional retirement savings.
In order to open an HSA, the client must be covered by a high-deductible health insurance plan. In 2014, clients with self-only coverage can contribute up to $3,300 annually to an HSA. Clients 55 or older can make an additional $1,000 catch-up contribution annually, but when a client begins receiving Medicare coverage, they are no longer eligible to contribute to the HSA.
See Robert Bloink and William Byrnes, HSAs: An Unconventional Retirement Income Planning Tool, Think Advisor, June 9, 2010.