Use HSA as a supercharged Roth IRA

Health Savings Plans (HSA) are an often misunderstood option when purchasing health care. They have many hidden financial benefits than most people are unaware of when selecting a health plan. For this post I will not be going into the extensive details of the HSA, they are thoroughly covered on the bogleheads site.

Your goal is to turn your HSA into a Roth IRA, which is a savings account that is not taxed when withdrawals are made. The benefits are:

  • An immediate tax deduction on the contribution since the contributions are federally tax free and tax free in most states
  • Earnings that grow tax free
  • Withdrawals that are tax and penalty free if used for qualified medical expenses. After 65, you can withdraw HSA funds penalty free, but will pay ordinary income taxes.
  • Unlike Traditional Deductible IRAs, there are no required minimum distributions (RMD)
  • Can withdraw it before 59 1/2 penalty free

The steps are as follows:

  1. Contribute the maximum amount to your HSA, ideally through your employer. For 2017, the limits are $3,400 for an individual and $6,750 for a family plan, plus $1,000 catch-up contributions if you are at least 55.
  2. Do NOT use the HSA for any expenses during the course of the year while you are still working. Use your rewards earning credit card for medical expenses. You’ll obviously need to be sure you have enough excess funds to cover those expenses.
  3. Use the HSA funds to pay for health care expenses after you retire.

Letting these HSA funds accumulate tax free allows you to pay for any of the following expenses in retirement:

  • All Medical, dental, drug, vision expenses
  • Medicare premiums or your employer’s retiree medical plan (buy not for Medicare supplement plans)
  • COBRA premiums
  • Long-term care services
  • Premiums for long-term care insurance

These expenses will be quite large in retirement and will easily exhaust your HSA funds, so there is no concern that you have saved too much and can not use all of the entire HSA funds.

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