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SKARBECK: HSAs are powerful way to save for retirement

September 16, 2017

Ken SkarbeckHealth savings accounts are one of the most attractive investment vehicles available in the marketplace. An HSA is the savings or investment account that is coupled with a high-deductible health plan.

More people are becoming aware of the triple-tax-advantaged benefits of an HSA: 1) The pre-tax contribution to an HSA is tax deductible; 2) the earnings accumulate tax deferred; 3) withdrawals are tax-free if they are used for qualified health expenses.

Assets in HSAs have tripled since 2012, to $43 billion, and are likely to reach $60 billion by 2019, according to HSA consultant Devenir Group.

While the health insurance industry is in abject disarray, it is almost certain that HSAs will play a central role in the eventual reforms made to the system. The recently failed House and Senate health care bills contained provisions to nearly double HSA contribution limits.

To qualify as an HSA-eligible plan, the high-deductible health plan must have a minimum deductible of $1,300 for a single person or $2,600 for a family. Also, the maximum annual out-of-pocket expenses (deductibles, copayments and other amounts, but not premiums) cannot exceed $6,550 for a single person and $13,100 for family coverage.

In 2017, a family that has an HSA-qualified plan can contribute up to $6,750 ($3,400 if single) into an HSA investment account. If account holders are over 55 years of age, they can contribute an additional $1,000, the “catch-up provision,” including both spouses in a family plan.

Before age 65, any withdrawals from an HSA that are not used for qualified medical expenses are taxable and subject to a 20 percent penalty. After age 65, any distributions that are not for medical expenses will still incur tax.

And while people often use their HSAs as a spending vehicle to pay for current health care costs, these accounts can, better yet, be used to accumulate significant assets for retirement health costs. Investors with HSAs who can pay for health care costs out-of-pocket and invest the HSA account in the stock market can compound their annual contributions over time, thereby creating another nest egg for retirement. By keeping track of cumulative health expenses paid over the years, the long-term investor can later reimburse himself for those expenses with tax-free withdrawals from his HSA.

Once you obtain health insurance that’s a qualified high-deductible health plan, there are several custodians to choose from to establish an HSA account, including HSA Bank, HealthEquity, Optum and Bank of America. It is important to review the various fees and the available investment options offered by these firms. Obviously, it is best to look for low custodial fees and low-fee investment options. Some custodians have a brokerage account feature that allows for investments in individual stocks or other securities.

One of the thoughts behind the HSA was to put the consumer in more control over health costs. HSA premiums were meant to be lower and the deductibles were set higher. The idea was that consumers would shop health care pricing and drive costs lower. However, premiums for HSAs soared under Obamacare, raising the ire of consumers.

With Congress planning to enhance the benefits of HSA accounts, these tax-advantaged accounts are excellent vehicles for investors to provide for their retirement medical costs.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 317-818-7827 or ken@aldebarancapital.com.

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