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Is HSA A Retirement Planning Vehicle?

6/21/2013

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Q. My company offers HSA, I heard I could invest money in HSA for retirement purpose, is it true?

A.  Yes, HSA is probably the least known yet a very powerful retirement planning vehicle.

Why?  Because we know there are two things one cannot avoid in the U.S. - tax and death.  HSA actually avoids tax entirely (if used appropriately) and also helps you prepare the unavoidable death.

HSA was introduced in 2003 as part of the HDHP (high deductible health plan).  Every HDHP participant is responsible for at least $1,250 deductible (individual) or $2,500 deductible (family), plus other out of pocket expenses.  To make HDHP attractive, government introduced HSA.  Here are three benefits of HSA:

Pre-tax contribution
Every HDHP participant can save pre-tax dollar into the HSA account to pay for deductibles and other healthcare related expenses.  The maximum saving amount is $3,250 (individual) or $6,450 (family), these amounts could be adjusted with inflation.

Tax-free growth
Money in an HSA account could be used for invest purpose, with no tax implication, this is especially powerful for young people with long investment time horizon.

Tax-free withdrawal
Each year, money in HSA could be rolled into next year for future use, there is no risk of losing it.  When you actually use the money for health care related expenses, you pay no tax!, 

Can you another tool with such great tax benefits?

What are some popular HSA money's uses?

HSA withdrawals could be used to pay for long term care bills, COBRA premiums, or medicare expenses when you reach age 65, just to name a few.

One effective way to use HSA is to open it for long term care expenses.  When you reach age 50-55, use the money from HSA to purchase a basic LTC policy, and use the rest to pay for any gap.

For more information about HSA, check out Treasury Department's website.

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