THE HSA: Your Next Best Retirement Savings Vehicle
With the increase in individual tax rates over the past several years, many have asked me how they can save more on a tax-advantaged basis. I think one of the best opportunities to save for retirement is through your Health Savings Accounts (HSA).
First, let’s review the benefits of a qualified retirement plan.
The money that is deferred goes in before federal taxes (in most states, not all)
The earnings grow tax deferred
You do not pay taxes on any gains until you take a distribution
Upon distribution, any amounts are taxed as ordinary income taxes. As a reminder, the maximum about you can contribute to the plan in 2016 is $18,000 (unless turning Age 50 or older, you can make an additional catch-up contribution of $6,000)
Now let’s look at saving into your Health Savings Account (HSA).
Money you defer for health care expenses in a HSA is generally deductible upon the initial deposit (you don’t pay taxes on these amounts)
Any earnings are not taxed, and
Qualified distributions are not taxed.
If you can defer the maximum amount into the HSA and pay for your current health care expenses out-of-pocket with other income (and not draw any funds from your HSA until in retirement) this could actually be more beneficial than contributing into your workplace retirement plan because you might never pay taxes on these amounts. This is assuming you use them for approved health care expenditures.
So, if you are looking for ways to maximize your retirement savings on a tax-advantaged basis, don’t forget to utilize your HSA accounts.