In today’s patch and postpone tax environment, health savings accounts (HSAs) can play an important role in your retirement savings strategy. HSAs are actually a hybrid of two legs from the New Three-Legged Stool™ strategy of building a tax-efficient retirement portfolio. An HSA allows you to set aside tax-deductible dollars today to provide funds for health-related expenses. The tax-deductible component acts like Leg One of the stool. The funds within the account are withdrawn tax-free if they are used for qualified medical expenses, which acts like Leg Three of the stool.
HSAs are available to anyone with a qualified high-deductible health insurance plan. The IRS defines a high-deductible health plan as one with annual deductibles between $1,200 and $6,050 for an individual plan ($2,400 and $12,100 for family plans). Anyone, including employers and other family members, can pay into the account once established. Yearly contributions to HSAs are limited and the amount changes annually. The maximum contribution in 2012 for an individual is $3,100 ($6,250 for a family).
Withdrawals of funds from HSAs are only tax-free if used to pay for qualified medical expenses not covered by the high-deductible plan health insurance plan. The definition of a qualified expense includes dental and vision expenses and even chiropractic, acupuncture, and other forms of alternative treatments. Funds can also be withdrawn tax-free to pay for medical supplies and long-term care insurance. Withdrawing the funds for any other reason are subject to a 20% penalty. The penalty is eliminated after you reach age 65.
An HSA is another important tool for those looking to build a tax-efficient retirement using the New Three-Legged Stool™ strategy. You should remember that a high-deductible plan is required but these plans are not necessarily the best choice for your situation. Your general health and that of your family members is an important consideration.