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Using your Health Savings Account as a retirement vehicle

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If you have a high deductible health plan, you can receive tax-preferred treatment of any money you set aside in a Health Savings Accounts (HSAs) to pay for medical costs. HSAs differ from Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs). (For more on these three types of health spending accounts please see this article One of the chief differences between HSAs and FSAs or HRAs is that HSAs can roll over year after year. The benefit of this is that while you cannot continue to add to an HSA once you are enrolled in Medicare, you can continue to use it.

One place you can use it is in paying for long-term care premiums. If you have a tax-qualified long-term care policy, you can use money in your HSA to pay for a policy if it pays for care when you are unable to perform at least two activities of daily living or if you have severe cognitive issues. Fortunately, most long-term policies qualify under these requirements but the limits depend upon your age. For instance, in 2014, if you were 40 or younger, you could use $370 tax-free from your HSA to pay for long-term care premiums. The amount goes up based on age so that an individual over the age of 70 could use $4,660 tax-free. You can also use HSA accounts to pay for Medicare Part B and Part D premiums, and Medicare Advantage premiums. If you have an individual health insurance policy and an HSA account, you can use funds tax-free from the HSA to pay for long-term care premiums and other expenses even if only one spouse has an HSA account.

Contributions to HSAs provide a current year tax deduction and your money grows in a tax-protected manner. If you use your money for healthcare (HSA funds can be spent on anything), it comes out of the account tax-free. That’s a triple tax advantage that 401(k)s can’t match.

The downsides to HSAs, aside from having to pay a penalty if you withdraw money for non-healthcare related expenses prior to age 65 and having to pay taxes on the withdrawal at any age if you withdraw funds for non medical needs, include being unprotected from creditors and that funds becomes fully taxable income to either your estate or your beneficiary so it’s best to fully spend it before you die.

Here’s more information on the benefits of an HSA account.

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