Your HSA can provide tax-free retirement income
Posted
Apr 29 2009, 03:59 PM
by
Karen Datko
Rating:
Mr. "GoTo" at Go To Retirement has a high-deductible health insurance plan and set up a companion health savings account. He used to draw on the HSA to pay for routine medical expenses not covered by insurance -- until it occurred to him that there's a better use for that money.
He discovered a way to tap an HSA for some tax-free, non-medical retirement income -- which is normally taxed -- and it's perfectly legal. That's right. Contributions to your HSA are tax-free, and non-medical withdrawals within certain limits can be too when you're 65 or older -- if you follow Mr. GoTo's advice. "To my knowledge," Mr. GoTo says, "there is no other legal investment option that gives you that advantage."
Here's how it works, according to his post "Tax-free retirement investing with your health savings account."
For those unfamiliar with HSAs, they are like a flexible spending account except: a) you must have a certified high-deductible health care plan in order to set one up; and b) any HSA money not used for medical expenses each year can be rolled over to the next. Invested much like an IRA or 401(k), your HSA continues to grow tax-free, particularly if you don't touch it.
IRS rules say that once you turn 65, you can use your HSA savings without penalty for non-medical spending but that you'll pay taxes on that amount. Here's where Mr. GoTo's plan comes in.
Remember, any withdrawals to cover medical expenses are always tax-free. And there is no time limit on when your HSA can reimburse you for those medical costs, as long as the expenses were incurred after your HSA was set up. (Need proof? You'll find it in this Treasury Department .pdf file.)
Thus, Mr. GoTo is paying for those expenses out-of-pocket -- everything from over-the-counter medications to doctor's bills not covered by the high-deductible insurance -- and stashing the receipts in a file. He won't withdraw money from his HSA to cover those expenses until he's retired.
"So, if I want to withdraw $2,500 in income (tax-free) in 2020, I can withdraw $2,500 from my HSA and match that money with $2,500 in receipts from our paper file," he explains.
Caveat: This makes good money sense only if you can afford your current medical expenses without the help of your HSA, and your HSA is invested and grows at a decent rate.
Saving up that HSA for retirement makes sense for other reasons as well. The money can be spent tax-free for retirement health care needs, including Medicare insurance premiums (but not Medigap) and long-term-care insurance.
Related reading:
Get cheaper medical coverage -- with a tax break
Your 5-minute guide to health insurance
Your retirement health care bill: $225,000
Will medical bills ruin retirement?
