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Do You Have A Super-IRA?

Well, it's not called an IRA, but an HSA -- a Health Savings Account. Why do I call it a "Super-IRA"? Because like a regular IRA, you get a tax deduction when you deposit money in the account. Like a Roth IRA, when you withdraw your money from the account, it is not taxed as income. And, like both types of IRA, your money grows tax-free; dividends and interest earned in the account are not taxed when received. So an HSA combines all three tax-free treatments into one account. The only restriction is that the money must be withdrawn to pay qualified medical expenses, but that list of qualifications is pretty broad. If, for some reason, you withdraw the money for a non-qualified reason, you will be taxed as if you received that money as ordinary income -- just like withdrawing it from an IRA. However, while the age limit and penalty for early withdrawal from an IRA is 59-1/2 and 10%, respectively, you'll pay a 20% penalty if you withdraw the HSA money before you turn 65.

How do you get an HSA? Well, normally, you would get it through your employer. In fact, your employer might also contribute money to your account (within limits), for you to use. The only requirement is that it be paired with a high-deductible health insurance policy. If you are self-employed, the deduction reduces your adjusted gross income (but does not reduce your payroll taxes, unlike the employee plan).

The number $250,000 has been floating around the Internet for a few years; you may have seen it as the estimate for what you will spend on medical expenses after age 65 (beyond what is covered by Medicare). Therefore, you should view the HSA as another form of saving for retirement, with the minor restriction that it can only be used to pay medical expenses. Does that seem too restrictive? Let's say you have good genes, and don't use anything near that amount. There are at least four reasons this is not a bad thing:

  • you can withdraw the money for other things, and just pay the income tax you would have paid (or less) when you put the money into the account

  • your spouse can inherit your HSA and use it as their own

  • a little known provision in the law allows you to pay medical expenses retroactively, so if your account is large because you used other income to pay prior medical expenses, you can go back and reimburse yourself for those expenses (as long as they were incurred while you had that high-deductible health insurance plan)

  • hey, you lived a long life without major medical problems -- how can that be a bad thing?

Forbes magazine has an excellent discussion of this account in their article
Turn Doctor Bills Into Retirement Income or give one of our financial advisors a call.

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