Health Savings Accounts (HSAs) are a phenomenal retirement savings vehicle. In fact, HSAs can be even beat a 401k plan as your #1 priority for retirement savings. And yet, the average growth of HSA balances has been far below its potential.
Health Savings Accounts were established as part of the 2003 Medicare Prescription Drug Improvement and Modernization. The primary qualification for an HSA is a high deductible health plan (HDHP) with very specific annual limits for deductibles and annual out-of-pocket maximums. These HDHPs may come via your employer, direct to individual insurance, and even the relatively new Healthcare Marketplaces.
Pre-tax contributions to an HSA avoid ALL taxes, even payroll taxes! 2016 Contribution is $3,350 for an individual or $6,750 for a family. A catch-up contribution of an additional $1,000 is available at age 55.
What makes an HSA a phenomenal retirement savings vehicle?
- Triple tax savings– tax free contributions, gains, and qualified withdrawals has the government paying you to save
- Balances can build year over year
- Balances can be invested into mutual funds
- Qualified withdrawals can be made at any time making an HSA an ideal vehicle for early retirees
- Medicare premium payments can be made from the HSA
- Nonqualified withdrawals after age 65 are treated the same as any other retirement account – no fee but you will have to pay income tax on the amount withdrawn
If the HSA is such a great account, it’s fair to assume that people are taking full advantage, right? A quick look at average HSA balances for accounts opened over the last 10 years will show a tremendous opportunity lost.