Do you have an HSA?
It wouldn’t be surprising if you did.
HSA consultancy Devenir found that as of summer 2015, there were 14.5 million such accounts in the US, holding over $US28 billion in assets.
The research predicts the account will only get more popular as time goes on.
A health savings account is exactly what it sounds like.
Health savings accounts were first offered in 2004 as a way to help Americans covered by high-deductible health insurance plans put aside money for healthcare costs. They are tax-advantaged as an incentive.
To qualify, you must be covered by a high-deductible health plan (HDHP), which has a minimum deductible of $US1,250 ($US2,500 for a family) and a maximum deductible of $US6,350 ($US12,700 for a family).
If your HDHP is your only coverage, you aren’t enrolled in Medicare, and you aren’t being claimed by anyone as a dependent, you can open an HSA whether your employer offers one or not. The IRS website has all the details on eligibility.
According to a census conducted by America’s Health Insurance Plans, nearly 17.4 million Americans were covered by health insurance plans eligible for HSAs as of early 2014.
An HSA is owned by an individual, not an employer, and you keep your HSA as you change employers throughout your career. In 2015, you can contribute up to $US3,350 to your HSA if you’re covered by an individual HDHP. If your whole family is covered by an HDHP, you can contribute up to $US6,650. Adults age 55 and older may increase each of these limits by $US1,000.
HSAs are unlike the seemingly similar FSA, in that you don’t have to spend all the money by the end of the year — any excess rolls over. Some “administrators” (companies that offer HSAs, including many banks) allow you to invest some or all of the money in your HSA, so it grows quickly like a retirement account rather than staying virtually static like traditional savings.
The tax structure of an HSA makes it appealing.
Now for the interesting part: Money you or your employer contribute to an HSA is tax deductible, whether or not you itemize your taxes. Then, if you withdraw the money to pay eligible qualified medical expenses, it still isn’t taxed, whether you take those withdrawals one year after opening your account or 25 years after.
That tax quirk makes an HSA an appealing option for saving for healthcare expenses in retirement. In fact, you can even use that money for non-healthcare expenses after age 65; although in that case, it will be taxed just like a traditional IRA or 401(k) would. (If you withdraw it for non-medical expenses before age 65, you’ll also be hit with a 20% penalty.)
You could consider it a loophole: If you leave your HSA largely untouched until after age 65, you’ve supplemented your retirement savings. Even if you don’t need it for healthcare expenses — which, let’s be honest, is unlikely in later years — the worst thing that happens is it’s taxed just like your other retirement accounts.
In fact, a 2014 report from the Employee Benefits Research Institute (EBRI) ran the numbers and found that someone who maxed out their HSA for 40 years without taking withdrawals (for someone planning to start taking distributions at age 65, that means they’d need to open the account at age 25) could save up to $US360,000 with a conservative 2.5% rate of return. With a more generous 7.5% return, that number inflates to nearly $US1.1 million.
HSA use has grown over the past decade, and is predicted to continue.
A 2015 white paper by Todd Berkley, president of HSA Consulting Services, asserts that this tax structure will make the account much more popular in the coming years. “No other investment vehicle offers the ‘triple tax savings’ combo of immediate tax relief from income and FICA taxes, tax-free growth, and tax-free withdrawals, along with the ability to pass it on to your spouse as a functioning HSA or to any other heir as part of your estate when you die,” he writes.
Devenir found that between June 2014 and June 2015, the number of HSA accounts increased by 23%. The research projects that by the end of 2017, there will be almost 25 million accounts.
Do HSAs sound too good to be true? Online investment firm Betterment highlights a drawback to the account: Because it’s only about a decade old, there are fewer rules and regulations governing it than for more established accounts like IRAs and 401(k)s. That means there may be less transparency when it comes to administrative fees, and the rules may be subject to change with the implementation of the Affordable Health Care Act.
That’s not to say that HSAs aren’t regulated — as Reuters points out, if your account is operated by a bank, it’s FDIC-insured, and if that money is in a mutual fund, it’s regulated by the SEC.
Bottom line: The EBRI estimates that a person who retires at age 65 would need over $US40,000 of savings just for recurring expenses like doctor and dentist appointments, without even getting into emergencies or hospital and nursing home stays. If you’re eligible, and you have the money to fund an HSA on top of your regular retirement account, it might be a good way to stash away more funds for later in life.
This article was written by Business Insider without the involvement of Merrill Lynch.
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