Want to get an extra $7.75k in your IRA?

It’s possible.  Only it isn’t an IRA.  It’s a Health Savings Account (HSA), available to anyone who is subject to a high-deductible healthcare plan ($1.3k individual/$2.6k family; out-of-pocket limits also apply) outside of Medicare and Medicaid.  The details underlying these accounts are almost too good to be true:

  1. There are no restrictions on earned income, i.e., anyone can contribute, regardless of salary or lack thereof.
  2. Contributions are fully deductible, either as a line-item deduction (itemization not needed) on your Federal return, or through a pre-tax payroll deduction at your employer (and some employers match your contributions).
  3. Contribution limits in 2016: Individual $3,350 ($4,350 if over 55), Family $6,750 ($7,750 if over 55).
  4. Contributions grow without being taxed for as long as they remain in the account.
  5. Withdrawals are permitted without penalty or tax consequence throughout your life if used for qualifying health care costs (including long-term care insurance premiums).  After age 65, withdrawals can be made without penalty for any reason, although they will be taxed as ordinary income if not used for qualifying health care costs.  
  6. There are no withdrawal requirements or required minimum distributions (RMD) from these accounts, unlike Flexible Spending Accounts or traditional IRAs and qualified retirement plans, e.g., 401(k), etc.

Thus, the accounts offer the best of both traditional and Roth IRAs (tax deductibility, tax free growth and tax free withdrawals if used for qualified purposes), without the downsides (RMDs, taxes on contributions, conversions, or withdrawals).  In addition, it’s a sneaky way to add to your retirement savings, whether or not you need the funds for health care costs, as withdrawals can be used for any purpose after age 65 (vs. 59.5 for an IRA) without penalty.  In short, it’s a savings unicorn.  With companies increasingly offering high deductible health care plans as part of their benefits packages (19% of workers in 2016, according to Kaiser Family Foundation), and the popularity of bronze plans under the Affordable Care Act (Obamacare), a large number of Americans are eligible for an HSA, yet likely too many fail to take advantage of their unique characteristics.  

As the tax deadline for 2016 approaches, consider making a HSA contribution if you are eligible.  It’s a tax-cagey way to hedge your health care costs while increasing your retirement readiness at the same time.


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