*NEW* 2009 HSA Contributions Limit Increases!

Health Savings Accounts Build Up Retirement Savings Health Savings Accounts are an a great way to build an additional retirement account.  These strongly tax-favored accounts, which have only been available since January of 2004, may be opened by anyone with a qualifying high deductible health insurance plan.  Once you open your HSA account, you can place tax-deductible funds or “contributions” into it, which then grow tax-deferred like an IRA.  You can withdraw money anytime, tax-free to pay for medical expenses. Health Savings Accounts:  Both a Tax-free Medical Investment Fund & Additional Retirement Account The real reason more people do not retire before the age of 65 is the lack of adequate health insurance (or having any at all), and sadly many Americans reach the age 65 totally unprepared for the medical expenses they will deal with once they do retire.  One of the most critical long-term reasons for establishing a Health Savings Account is to build up funds for medical expenses that are incurred during retirement. Fidelity Investments reports that the average couple retiring in 2008 will need $225,000 just to cover their medical expenses during retirement.  This estimate, increasing an average of 5.8% per year since 2002, includes the cost of Medicare Part B and Part D premiums, deductibles & excluded benefits, copayments, & of out-of-pocket costs for prescription drugs.  This doesn't even factor in the costs of over-the-counter meds, a majority of dental services, & if needed... long-term care.  Assuming life expectancies of fifteen years for the husband & twenty years for the wife, add these additional costs together, & the Employee Benefit Research Institute reports that you’ll actually need over $295,000.  Since for American medical costs are rising more than three times faster than salaries, people "should be calculating & factoring life-long health-care expenses into their overall financial planning," says Brad Kimler, a Fidelity executive. HSAs are without exception, the smartest way to build up money to pay for these medical expenses during retirement.  You should not be contributing any funds to your traditional 401 (k), IRA, or any other savings account until you have first maximized your full contribution to your Health Savings Account.  This is because only HSAs permit you to make tax-free withdrawals to pay for you and your family's medical expenses.  You may take these distributions at anytime before or after the age of 65. Your HSA contributions will not affect your IRA limits ...$3,000 per year or $3,600 for those over age 55.  HSAs are merely another powerful tax-deferred way to save for retirement, yet with the added advantage that you may withdraw money tax-free if they are used to pay for medical expenses. For early retirees who are healthy, a health savings account can be a wise method to assist in lowering health insurance costs while waiting for Medicare coverage.  The older a person is, the more funds they can contribute to their HSA plan.  For many people in their 50's & 60's who are not yet eligible for Medicare, HSAs are by far the most affordable way to have health coverage today and also save for the future. How Much Can You Save or “Contribute” into your HSA? The contribution limit is indexed to the Consumer Price Index (CPI), so it will increase at the rate of inflation. Any funds you deposit in your health savings account is 100% tax-deductible, & the money in the account grows tax-deferred like an IRA.  In 2009, the maximum contribution for a single person is $3,000 ($2,900 in 2008).  For families, the maximum contribution is $5,950 ($5,800 in 2008). If you're 55 and older, you can put in an extra $900 catch-up contribution in 2008 and an additional $1,000 from 2009 and thereafter.  Future Value of Your Health Savings Account How much money you accumulate in your health savings account will depend on what you contribute per year, the number of years you contribute, the investment return, & how much money you withdraw from the account over the years.  If you regularly fund your HSA & stay relatively healthy, a substantial amount of wealth can accumulate in your account.   Individual's Savings HSA Growth Over 30 Years.  Based on a maximum yearly contribution of $3,000 Medical Expenses Per Year 5% Annual Return 10% Annual Return $0 $199,317 $493,482 $500 $166,097 $411,235   Family's Savings HSA Growth Over 30 Years.  Based on a maximum yearly contribution of 5,950 Medical Expenses Per Year 5% Annual Return 10% Annual Return   $0   $395,311 $978,739   $1,000  $328,872 $814,245   To calculate the future value of your own HSA account based on your deposits, investment return, & number of years until retirement, please click on HSA Calculators . HSA Investment Options With health savings accounts, you have 100% control over how & where you invest your funds.  There are numerous banks to choose from that can serve as your HSA administrator.  Some offer only low interest bearing savings accounts, while others offeraccess to a full-service brokerage where you can invest your funds into stocks, bonds, mutual funds, or other types of investment vehicles.  See our HSA Administrators page for a list of recommended options. How Tax-deferred Growth Will Accelerate Your Retirement Account Growth One of the greatest advantages of retirement accounts such as HSAs are that the funds are allowed to grow without being taxed every year.  Over time, this can dramatically increase your returns.  For example, if you are in the 33% tax bracket, you would need a 15% return on a taxable investment to match a tax-deferred return of only 10%. To put it another way, if you are in a 33% tax bracket and were to invest $5,800 each year in a taxable investment that yielded a 15% return, you would have $312,149 after twenty years.  If you placed those same funds in a tax-deferred investment vehicle such as an HSA, you would have $558,317. That's over $240,000 more! Strategies to Maximize HSA Account Growth If your objective is to maximize the growth of your health savings account in order to build up additional money for your retirement, there are three important strategies you should seriously implement. Strategy One: Throgh your has administrator, invest your monies into mutual funds or other investments that have real growth potential.  Though this is riskier than placing your funds in an FDIC-insured savings account, it is the only way to truly take advantage of the tax-deferred growth opportunity that an HSA provides. The level of risk is always entirely up to you. For example, a conservative mutual fund is more likely to yield a bigger return than a low interest bearing savings account. Strategy Two: Avoid and/or delay any withdrawals from your hsa account for as long as possible.  Though you always can withdraw money from your HSA at any time tax-free to pay for HSA Eligible Expenses , you do actually have the option of not touching the money in your HSA so that it continues to grow tax-free.  As long as you keep your medical expense receipts, you may make withdrawals to reimburse yourself at any future date to for the medical expenses incurred today. There is no time limit restriction on reimbursement. As an example, let's say a 43 year old couple places $5,800 per year in their health savings account over a period of twenty years, they incur $2,000 per year in qualified medical expenses, & they receive a 12% return on their hsa account investments.  If they withdraw the $2,000 from their HSA each year, they'll have a net contribution of $3,600 per year into their account, & they'll have accumulated $248,581 in their hsa account when they begin their retirement years. If instead, they delay withdrawing those funds, they will have $392,686 in their hsa account at age 65.  At this time, if they choose they can still withdraw the $40,000 ($2,000 x 20 years) to reimburse themselves tax-free for the medical expenses incurred during that twenty year period, but would still have $352,686 in their hsa account. This is over $100,000 more than if they had withdrawn the money each year! Thus the timing of your withdrawals makes a significant difference even being that the withdrawal amounts are 100% identical. Strategy Three: Deposit the maximum allowable contribution to your HSA at the beginning of each year.  Even though you are permitted until April 15th of the following year to make deposits to your health savings account, you should take advantage of the time factor of tax-free growth in your account by funding it as early as possible.  The additional interest you will earn by contributing to your account on January 1st of each year rather than the next April 15th can amount to over $40,000 in a twenty year period, & over $100,000 in 30 years. How to Further Maximize your HSA Contributions Since catch-up contributions are allowed only for people age 55 & older, if either one or both of you are over age 55 you should each establish your own separate health savings account.  This will effectively leverage you to capitalize on the higher HSA contribution limits for people in this age range. Using your Health Savings Account to Pay for Medical Expenses during Retirement When you enroll in Medicare, you may use your hsa account to pay Medicare premiums, deductibles, coinsurance, & copays under any part of Medicare.  If you have retiree health benefits through your former employer, you may also use your account to cover paying your share of retiree medical insurance premiums.  The only medicare-related expense you cannot use your account for is to purchase a Medicare supplement insurance or "Medigap" policy. Though Medicare will pay for much of your of health expenses during retirement, there are many significant expenses that Medicare will not cover.  These include nursing home expenses, un-conventional treatments for terminal illnesses, and proactive health screenings. You can pay for all of these from your HSA. Long-term care is defined as assistance with the activities of daily living (called “ADLs”), such as feeding, dressing, or bathing yourself. These services can be provided in your home, a retirement community, or a nursing home.  Long-term care expenses and even long term care insurance can be paid for using funds from your health savings account. These insurance premiums may be funded up to the following maximum annual amounts depending on age:   Age 40 or under: $260 Age 41 to 50: $490 Age 51 to 60: $980 Age 61 to 70: $2,600 Age 71 or over: $3,250 How to Establish an HSA To establish a health savings account, you must own an HSA-qualified high deductible health insurance plan.  First review our website and then contact us via phone, email, or web form.