Using Your Health Savings Account To Build Retirement Savings
by Wiley Long
Health Savings Accounts are an excellent way to build a second
retirement account. These tax-favored accounts, which have only
been available since January of 2004, can be opened by anyone
with a qualifying high-deductible health insurance plan. Once
you open an HSA account, you can place tax-deductible
contributions into it, which grow tax-deferred like an IRA. You
may withdraw money tax-free to pay for medical expenses at any
The biggest reason more people don't retire before age 65 is
lack of health insurance, and many Americans reach age 65
woefully unprepared for the medical expenses they'll face once
they do retire. 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.
HSAs 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
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 is
indexed 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
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 others offer mutual funds or
access to a full-service brokerage where you may place your
money in stocks, bonds, mutual funds, or any number of
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% return
on a taxable investment to match a tax-deferred yield of only
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 an
HSA, 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.
Once that person turns 65 and is no longer eligible to
contribute to their HSA, you can open another health savings
account in the younger spouse's name.
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
investments that have growth potential. Though this is riskier
than placing your money in an FDIC-insured savings account, it
is the only way to really take advantage of the tax-deferred
growth opportunity that an HSA provides.
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
future date to reimburse yourself for medical expenses incurred
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
per year into their account, and they'll have $248,581 in their
account when they begin their retirement years.
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.
Using 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
Medicare supplemental insurance or "Medigap" policy.
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
living, such as dressing, bathing, or feeding yourself. It can
be provided in your home, a retirement community, or a nursing
home. Long-term care expenses can be paid for using funds from
your HSA, and long-term care insurance can even be paid for from
the HSA up to the following maximum annual amounts:
- Age 40 or under: $260 - Age 41 to 50: $490 - Age 51 to 60:
$980 - Age 61 to 70: $2,600 - Age 71 or over: $3,250
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. HSA for America makes it easy to learn about and set up health savings accounts.