If you haven’t been paying much attention to changes in your employer’s health insurance program you could be missing out on one option that can help boost your retirement savings. Yes, a health insurance strategy that has a retirement angle. More and more companies have added a high-deductible health insurance plan to their lineup in recent years.
I know what you’re thinking: Of course they are! That reduces their costs.
Absolutely right. But it can also make great sense for you as well. When you sign up for the high deductible health plan you become eligible for a Health Savings Account (HSA). An HSA works a lot like a good old traditional IRA: You make pre-tax contributions (thereby lowering your taxable income for the year), and the money in your HSA grows tax deferred. You’re free to use money in the HSA to pay for any medical expenses you incur right now, and withdrawals for qualified health-care related costs are 100 percent tax free.
Any unused money in your HSA you don’t need to use the year you made the contribution just sits in your account and keeps growing. That’s a nice deal, but here’s where it gets really intriguing: Any unused money in your HSA you don’t need to use the year you made the contribution just sits in your account and keeps growing. For as long as you please. Make it to retirement and you can withdraw the money to cover any medical expenses—again, withdrawals for medical expenses are 100 percent tax-free. Moreover, you can tap your HSA in retirement for non-medical expenses as well. You’ll just pay ordinary tax on the withdrawal—with no extra penalty. Exactly like a Traditional IRA.
HSAs Go Mainstream
According to the Employee Benefit Research Institute there was less than $1 billion in HSAs in 2007; by the close of 2010 that was up to nearly $8 billion. Perhaps it’s time for you to take a look as well. Fall is typically when employers let the staff review and revise their benefits coverage. I’d highly suggest the time it takes to run through the math of how these plans work is a solid investment, as it can reduce your upfront health care costs today and potentially add tens of thousands of dollars to your retirement pot.
- You’re on the hook for a high health insurance deductible. To be considered a high-deductible health plan in 2011 the minimum deductible must be at least $1,200 for individuals or $2,400 for family coverage. Obviously, this sort of plan makes the most sense if you’re a healthy sort, who isn’t likely to run up a big bill.
- But there’s a limit to your health insurance out of pocket. Don’t worry, if you do end up with needing more medical care in any given year you’re not on the hook for it all. In 2011 the maximum out of pocket for a high-deductible health plan is $5,950 for individuals and $11,900 for family coverage.
- You can sock away as much as $6,050 in an HSA. If the high-deductible plan makes sense, then you get to pair it with the HSA. The maximum you can set aside this year is $3,050 for individuals and $6,150 if you have family coverage. If you’re at least 55 years old, you can tuck away an additional $1,000 a year above those limits. (Those annual contribution limits are adjusted periodically in line with inflation.)
- The HSA can be used to pay all sorts of medical costs. You’ll have to pay your health insurance premium out of your regular cash-flow; it’s one of the few medical costs you can’t pay for from your HSA balance. But pretty much everything else is fair game. Co-pays, deductibles, and of course out of pocket costs. And hey, if you’re thinking about Long Term Care Insurance, you can pay the premiums for that coverage with HSA funds. Given the high cost of LTC insurance, that’s a pretty sweet way to pay for it out of pre-tax dollars.
- An HSA can double as a nice ancillary retirement account. Setting aside as much as $6,000 or so a year above and beyond what you can save in your $401(k) and IRA is going to do wonders for the health of your retirement security.