HSAs for Retirement Planning

Although many people think of Health Savings Accounts (HSAs) as simply a vehicle to pay current medical expenses, they can also be a valuable component of retirement savings. Contributions can be invested like a 401(k), and the growth inside the account is not taxed currently.

Prior to age 65, distributions for qualified medical expenses, long-term care insurance, COBRA coverage, and health coverage while receiving unemployment compensation are tax-free. Other distributions are subject to tax, as well as a 20% penalty.

Starting at age 65, distributions for Medicare premiums for Part A, B, or D and for Medicare HMO are tax-free. Other distributionsĀ are taxable, but are not subject to the 20% penalty. Thus, much like an IRA, you can defer income taxes on the contributions and their growth until withdrawn.

Unlike an IRA, there are no minimum required distributions for an HSA during the participant’s life. A participant can hold an HSA until death and designate a beneficiary. If the beneficiary is the participant’s spouse, the spouse treats the inherited HSA as his or her own account. If the beneficiary is someone else, the fair market value of the HSA becomes taxable to the beneficiary in the year of death.

If you are looking for a last minute deduction, it’s not too late to contribute to your HSA. For individuals covered by a high deductible health plan, the limit is $3,350. For families, the limit $6,750. Contributions made by the due date for filing your income tax return, April 18, 2017, can be deducted in 2016.

Posted by Joel D. Roettger, JD, LLM, EPLS

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