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Could an HSA strengthen your retirement plan?

Could an HSA strengthen your retirement plan?

July 12, 2016 | Bill Cass, CFP®, CPWA®

A 401(k) plan may not be the only way to save for retirement expenses and secure tax advantages.

Certain health-insurance plans allow participants to set up Health Savings Accounts (HSAs). These accounts provide tax advantaged savings that can be used for qualified health expenses. Similar to a 401(k), contributions to these accounts can be made through payroll deduction within annual limits.

HSAs are typically offered to people enrolled in health insurance plans that have a high deductible. Most HSA plans are available through an employer. But, with the Affordable Care Act, individuals may purchase an HSA through a state insurance exchange. HSAs are growing rapidly. The Employee Benefit Research Institute found there were 2.9 million accounts with a total of $5 billion in assets at the end of 2014. Moreover, nearly 80% of those accounts were opened since the beginning of 2011.

Since an HSA does not have a time limit for distribution of the funds and is portable, it can be an effective option for addressing health-care costs in retirement. When an individual leaves a job and is no longer enrolled in a plan that provides for an HSA, he or she retains ownership of the account and can still make withdrawals for health expenses.
 
Several tax advantages are provided:

  • Contributions are made with pretax dollars
  • Funds grow tax free
  • Distributions are not taxed if they are used for qualified medical expenses

There are contribution limits. For 2016, the maximum contribution is $3,350 for an individual and $6,750 for a family. Individuals who are 55 and older may make an additional $1,000 catch-up contribution.

Individuals must also be mindful of how they use the funds. Withdrawals for anything other than a qualified medical expense are subject to a penalty tax as well as income tax. For those 65 and older, making a withdrawal for a non-qualified expense will trigger the income tax but not the penalty tax.

For more details on how HSAs are used, tax treatment, and limitations, view the Internal Revenue Service’s (IRS) information page.

With any planning opportunity, it’s important for investors to meet with an advisor to determine how a specific type of savings account may fit within an overall financial plan. To explore additional planning considerations for health-care expenses in retirement, check out Putnam’s investor education article, “Successful retirement planning must consider health-care factors.”


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