How an HSA can help cover health care costs and serve as a triple-tax-free, stealth IRA investment plan
Question: My employer has recently gone to a high-deductible health plan (HDHP), so I became eligible this year to use a health savings account (HSA). What is the best way to use my HSA?
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Answer: In 2014, HDHPs must have a minimum deductible of $1,250 if you’re single ($2,500 family) and a maximum out-of-pocket amount of $6,350 ($12,700 family). The plan may offer preventive care for a lower deductible (or none at all) and still qualify. If your only health coverage is a HDHP, then you qualify for an HSA and may contribute up to $3,300 ($6,550 family), with a $1,000 “catch-up” contribution if you’re older than 55. Even if your spouse is covered by a non-HDHP, as long as you are not, you may still use an HSA, and if at least one of your children is also not covered by a non-HDHP, you may contribute the higher family amount.
There are two ways that people use their HSAs. The first is to pay for health care in the year you make the contribution. If you get a CT scan for $1,000, you use the HSA money to pay for it. Not only do you get to use untaxed dollars to pay your health-insurance premiums (at least if you’re self-employed), you also get to pay for unreimbursed health care using untaxed dollars. If you plan to use your HSA to pay your deductible and other health-related expenses in the near future, you want to invest the money very conservatively, probably in the savings-account option of your HSA.
HSAs for Long-Term Savings
The second way to use an HSA is as a “Stealth IRA.” Many physicians need to save more money for retirement each year than they are allowed to contribute to their available retirement plans. While a taxable investing account is always an option to save more, an HSA offers three significant advantages over a taxable account as a retirement savings plan. First, just like any other retirement plan, it offers an estate-planning advantage in that you can simply name a beneficiary on the account instead of having those assets go through probate. Second, although asset protection is always state-specific, your state may protect assets in an HSA from your creditors in a lawsuit or bankruptcy proceedings. Last, and most important, an HSA is the only “triple-tax-free” account.