The Wall Street Journal
A Healthy Aid to Retirement
Investors Seize on Tax Advantages of HSAs
By VICTORIA E. KNIGHT
January 5, 2008; Page B2
Health savings accounts were touted as a way of making health care more affordable for American families when they were launched four years ago. But some of the accounts' biggest beneficiaries are proving to be well-to-do investors looking for another way to fund their retirement savings. The accounts are aimed at lowering insurance premiums for individuals and employers by giving consumers more control over -- and a bigger stake in -- their health spending.
HSAs enable you to pay for current health-care expenses, such as co-pays and deductibles, and save for future expenses, such as Medicare premiums, on a tax-free basis. In 2008, the maximum annual contributions are $2,900 for individuals and $5,800 for families. Anyone -- you, your employer, relatives -- can make contributions to your account. Unlike the more widely used and better-known flexible-spending accounts, savings not needed to pay for out-of-pocket medical expenses can accumulate in HSAs for years. That is sparking the interest of firms looking to manage these assets.
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You can fund your HSA with pretax or tax-deductible dollars, which then grow tax-free, and any withdrawals you make to pay for qualified medical expenses aren't taxed either. Money in the accounts can be invested in stocks, bonds, mutual funds and certificates of deposit. Merrill is managing about 20,000 HSAs for clients, mainly doctors, lawyers and accountants, says Mr. Halliday. The catch? By law, you must be covered by a high-deductible health plan, or HDHP, to qualify for an HSA. HDHPs have lower premiums than more traditional types of plans, such as preferred-provider organizations or health-maintenance organizations but you have to pay more out-of-pocket before your insurance kicks in. On the plus side, HSAs are portable. If you switch jobs, you keep the money that is in the account -- including any employer contributions.
An HSA can provide a valuable source of retirement income alongside your 401(k) and individual retirement account if you let your funds grow. Individuals who are 55 and older can make additional "catch-up" contributions to HSAs of $900 in 2008, and $1,000 in 2009 and thereafter. Once you turn 65, distributions for nonmedical expenses are taxed as ordinary income; if you are younger, be prepared to pay an additional 10% penalty... Another advantage to HSAs: Unlike an IRA, where you are required to make mandatory distributions at age 70½, there are no time constraints on HSA withdrawals. Moreover, your HSA dollars can fund other aspects of your retirement.
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In order to qualify for an HSA in 2008, your insurance plan must have a deductible of at least $1,100 for individual coverage or $2,200 for family coverage, according to the Internal Revenue Service. Your health status, income and any employer contributions are important factors to consider when deciding whether an HDHP linked to an HSA is right for you. Maxing out on annual contributions to an HSA can be an astute financial strategy for the well-heeled who can afford to cover any out-of-pocket medical expenses without dipping into their HSA.
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http://online.wsj.com/article/SB119949664525669233.html (subscription)
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