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Using Your Health Savings Account To Build Retirement Savings
One of the most important long-term reasons for establishing an HSA is to build up some money for medical expenses incurred during retirement. Fidelity Investments reports that the average couple retiring in 2006 will need $190,000 to cover medical expenses during retirement. This assumes life expectancies of 15 years for the husband and 20 years for the wife.
Health Savings AccountHSAs are, without exception, the best way to build up money to pay for medical expenses during retirement. You should not contribute any money to your traditional IRA, 401 (k), or any other savings account until you have maximized your contribution to your HSA. This is because only health savings accounts allow you to make withdrawals tax-free to pay for medical expenses. You can take these distributions anytime before or after age 65. Your HSA contributions won't affect your IRA limits -- $3,000 per year or $3,600 for those over 55. It's just another tax-deferred way to save for retirement, with the added advantage being that you can withdraw funds tax-free if they are used to pay for medical expenses. For early retirees who are healthy, a health savings account can also be a smart option to help lower their health insurance costs while they wait for their Medicare coverage. The older someone is, the more they can save with an HSA plan. For many people in their 50's and 60's who are not yet eligible for Medicare, HSAs are by far the most affordable option. Any money you deposit in your health savings account is 100% tax-deductible, and the money in the account grows tax-deferred like an IRA. For 2006, the maximum contribution for a single person is the lesser amount of your deductible or $2,700. In other words, if your deductible is $3,000, you can contribute a maximum of $2,700; if your deductible is $2,000, then that is the maximum. For families, maximum is the lesser of $5,450 or the deductible. If you're 55 and older, you can put in an extra $700 catch-up contribution in 2006, $800 in 2007, $900 in 2008, and an additional $1,000 from 2009 onward. The contribution limit isindexed to the Consumer Price Index (CPI), so it will increase at the rate of inflation each year. How much you accumulate in your HSA will depend on how much you contribute each year, the number of years you contribute, the investment return you get, and how long you go before withdrawing money from the account. If you regularly fund your HSA, and are fortunate enough to be healthy and not use a lot of medical care, a substantial amount of wealth can build up in your account. Health savings accounts are self-directed, meaning that you have almost total control over where you invest your funds. There are numerous banks that can act as your HSA administrator. Some offer only savings accounts, while othersoffer mutual funds or access to a full-service brokerage whereyou may place your money in stocks, bonds, mutual funds, or any number of investment vehicles. One of the biggest advantages of retirement accounts like HSAs are that the funds are allowed to grow without being taxed each year. This can dramatically increase your return. For example, if you are in the 33% tax bracket, you would need a 15% returnon a taxable investment to match a tax-deferred yield of only 10%. As another example, if you are in a 33% tax bracket and were to invest $5,450 each year in a taxable investment that yielded a 15% return, you would have $312,149 after 20 years. If you put that same money in a tax-deferred investment vehicle like anHSA, you would have $558,317 - over $240,000 more. Because catch-up contributions are allowed only for people age 55 and
older, if one or both of you are under age 55 you should establish your
HSA in the older spouse's name. This will allow you to capitalize on
the expanded HSA contribution limits for people in this age range and
maximize your HSA contributions. Strategies to Maximize your HSA Account Growth If your objective is to maximize the growth of your HSA in order to build up additional funds for your retirement, there are three important strategies you should implement. Strategy #1: place your money in mutual funds or other Strategy #2: delay withdrawals from your account as long as possible.
Though you may withdraw money from your HSA tax-free at any time to
pay for qualified medical expenses, you do have the option of leaving
the money in the HSA so that it continues to grow tax-free. As long
as you save your receipts, you can make medical withdrawals from your
account tax-free at any As an example, let's say a 45 year old couple places $5,450 per year
in their HSA over a period of 20 years, they have $2,000 per year in
qualified medical expenses, and they get a 12% return on their investments.
If they withdraw the $2,000 from their HSA each year, they'll have a
net contribution of $3,450 If on the other hand they delay withdrawing that money, they will have $392,686 in their account at age 65. If they choose they can withdraw the $40,000 to reimburse themselves tax-free for the medical expenses incurred during that 20 year period, and still have $352,686 in their account - over $100,000 more than if they had withdrawn the money each year. Strategy #3: make the maximum allowable deposit to your HSA at the beginning of each year. Even though you are allowed until April 15 of the following year to make deposits to your HSA, you should take advantage of the tax-free growth in your account by funding it as soon as possible. The extra interest you can earn by contributing to your account on January 1 of each year rather than the next April 15 can amount to over $40,000 in a 20 year period, and over $100,000 in 30 years. Retirement SavingsUsing Your HSA to Pay for Medical Expenses during Retirement When you enroll in Medicare, you can use your account to pay Medicare
premiums, deductibles, copays, and coinsurance under any part of Medicare.
If you have retiree health benefits through your former employer, you
can also use your account to pay for your share of retiree medical insurance
premiums. The one expense you cannot use your account for is to purchase
a Though Medicare will pay for the majority of health expenses during retirement, there many be expenses that Medicare will not cover. Nursing home expenses, un-conventional treatments for terminal illnesses, and proactive health screenings are all examples of medical expenses that will not be paid for by Medicare, but that you can pay for from your HSA. Long-term care is assistance with the activities of daily - Age 40 or under: $260 To establish a health savings account, you must first own an HSA-qualified high deductible health insurance plan. Compare HSA plans side by side to determine the best value to meet your needs. Once you have your high deductible health insurance plan in place, you can open your Health Savings Account with the financial institution of your choice. About The Author: By Wiley Long - President, HSA for America (http://www.health--savings--accounts.com). HSA for America makes it easy to learn about and set up health savings accounts online.
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