Anyone who's enrolled in a high-deductible health plan (HDHP) has the option of opening a Health Savings Account, or HSA. It's a special account that allows you to contribute tax-deductible money into it, which can later be withdrawn tax-free to reimburse the account owner for qualified medical expenses.
One of an HSA's best features -- and least talked about -- is that you have your entire lifetime to use the money in it to reimburse yourself. As long as you had an HSA at the time you incurred a qualifying medical expense and you save your receipts as proof that you weren't reimbursed, you can take the money out of your HSA tax-free to reimburse yourself, even many years after you incurred the expenses. Also, there's no age at which you must begin taking withdrawals, as there is for IRAs, which have required minimum distributions at age 70 1/2.
That's right. You get a tax deduction (up to the limits) for the the money you contribute to your HSA, where it can be left for many years, growing tax-deferred. Then you can take it out many years later, such as in retirement. Unique to HSAs, these features make the accounts ideal vehicles to supplement your retirement savings. One of the many qualifying expenses you can use your HSA for is to pay premiums for health insurance or long-term care insurance when you're 65 or older.
In 2016, the maximum annual contribution you can make to an HSA is $3,350 for a person with a single-coverage HDHP and $6,750 for qualifying family coverage. And if you're 55 or older in 2016, you can contribute an additional $1,000 per year over these limits.
What if you want to contribute to an HSA but don't have the cash to do it? If you have money in an IRA from a 401(k) rollover, another unique feature is that the law allows for a one-time transfer of IRA assets to fund an HSA. The amount transferred may not exceed the annual contribution limits, and the transfer, while not taxable, also isn't tax-deductible because it's coming from a source of pretax money.
If you faithfully add to an HSA over the course of 20 years, you could contribute as much as $75,000 to $140,000 (depending on if you have single or family coverage). Over that time, investment growth could double these amounts, assuming an average annual 5 percent return.
If you have money in an HSA when you die and your spouse is the named beneficiary, your spouse becomes the account owner and can use it as his or her own. If the beneficiary isn't your spouse, the HSA ends on your death and the account is fully paid out, as taxable income to your beneficiary.
Money in an HSA can be held in a bank deposit account or in a brokerage account and be invested in mutual funds. But given that these accounts can be used for longer-term savings -- and as a supplement for retirement savings -- keeping your money in a bank account-type HSA doesn't really make sense. Instead, you should put it in a brokerage account and invest in a similar investment allocation and strategy as you do for your 401(k), IRA or other retirement savings plan.
Larger employers may choose an HSA provider as the only option for their employees, particularly when the employer is contributing to these accounts as an inducement to get employees to enroll in an HDHP. But midsize and smaller employers typically allow you to choose any HSA provider. Selecting one is a personal choice, so you'll want to choose a provider that suits your own needs.
One of the most widely used HSAs is offered by HSA Bank. Its account can be linked to a brokerage account provided by TD Ameritrade (AMTD), where you can invest the money in a wide array of mutual funds, stocks, etc. Other banks, such as Wells Fargo (WFC), also offer HSAs.
Before you choose an HSA, make sure to consider its fees. Typical ones include monthly maintenance fee, overdraft fees and fees for copies of statements. You should also check with your own bank to see if it offers an HSA product.