Making High-Deductible Health Savings Accounts Work

DONALD JAY KORN, FOR INVESTOR'S BUSINESS DAILY writes:    Health savings accounts are tax-efficient tools that can help with retirement planning. Like 401(k) accounts and Roth IRAs, investment income inside an HSA is not taxed.

And HSAs offer some tax advantages that other plans don't. For one, contributions to HSAs are tax-deductible. That's not the case with Roth IRAs.

Also, HSA withdrawals can be tax-free. Withdrawals from traditional 401(k)s aren't.
The average retired couple will need about $220,000 to cover health costs, says a Fidelity study.

To benefit from all HSA tax breaks, money must be spent on qualified health care. "Given the high projected costs of health care in retirement, the vast majority of retirees should have plenty of eligible costs to cover," said William Applegate, a Fidelity vice president.
In 2012, the number of HSAs rose almost 22% to 8.2 million, reported Devenir, a consulting firm.

To have an HSA, you need a qualified high-deductible health insurance plan. Such HD plans can come through your job or be purchased on your own.

Qualifying plans have an annual deductible not less than $1,250 for individual coverage in 2013. For family coverage, the minimum deductible is $2,500. Annual out-of-pocket expenses can't top $6,250, or $12,500 for families. Those limits apply to deductibles and co-payments but not to premiums.

Once your own and any company contributions are in an HSA, you can withdraw funds tax-free for eligible expenses. Generally, that means costs that qualify as itemized medical or dental deductions.

So HSA owners can use their HSA to cover costs now, or they can let their money grow to cover health bills when they're in retirement.

Create A Strategy
One strategy is to put your first retirement dollars into your 401(k) if your employer offers a match. Contribute enough to get the maximum match.  Dollars above that amount can go to an HSA, before making an unmatched 401(k) contribution.
 
Suppose a hypothetical Ed Hill wants to put away $15,000 for retirement this year. Hill, age 56, has family coverage in the company health plan and an HSA.

In his 401(k), his employer offers a 100% 401(k) match, up to 6% of pay.
If Hill's salary is $100,000, 6% is $6,000. So Hill's first $6,000 goes to the 401(k), to get a $6,000 match. That's a 100% immediate return, with no investment risk.
Then Hill kicks in $7,450 to his HSA this year. That's the $6,450 max for family contributions plus the $1,000 age-55-plus catch-up.