Build Your Retirement Savings with Your Health Care Savings Account

Health Savings Accounts are an excellent way toon the expanded HSA contribution limits for people in
build a second retirement account.  Thesethis age range and maximize your HSA
tax-favored accounts, which have only been availablecontributions.  Once that person turns 65 and is no
since January of 2004, can be opened by anyonelonger eligible to contribute to their HSA, you can
with a qualifying high-deductible health insurance plan. open another health savings account in the younger
Once you open an HSA account, you can placespouse's name.
tax-deductible contributions into it, which growStrategies to Maximize your HSA Account Growth
tax-deferred like an IRA.  You may withdraw moneyIf your objective is to maximize the growth of your
tax-free to pay for medical expenses at any time.HSA in order to build up additional funds for your
The biggest reason more people don't retire beforeretirement, there are three important strategies you
age 65 is lack of health insurance, and manyshould implement.
Americans reach age 65 woefully unprepared for theStrategy #1: place your money in mutual funds or
medical expenses they'll face once they do retire. other investments that have growth potential. 
One of the most important long-term reasons forThough this is riskier than placing your money in an
establishing an HSA is to build up some money forFDIC-insured savings account, it is the only way to
medical expenses incurred during retirement.really take advantage of the tax-deferred growth
Fidelity Investments reports that the average coupleopportunity that an HSA provides.
retiring in 2006 will need $190,000 to cover medicalStrategy #2: delay withdrawals from your account as
expenses during retirement.  This assumes lifelong as possible.  Though you may withdraw money
expectancies of 15 years for the husband and 20from your HSA tax-free at any time to pay for
years for the wife.qualified medical expenses, you do have the option
HSAs are, without exception, the best way to buildof leaving the money in the HSA so that it continues
up money to pay for medical expenses duringto grow tax-free.  As long as you save your
retirement.  You should not contribute any money toreceipts, you can make medical withdrawals from
your traditional IRA, 401 (k), or any other savingsyour account tax-free at any future date to
account until you have maximized your contributionreimburse yourself for medical expenses incurred
to your HSA.  This is because only health savingstoday.
accounts allow you to make withdrawals tax-free toAs an example, let's say a 45 year old couple places
pay for medical expenses.  You can take these$5,450 per year in their HSA over a period of 20
distributions anytime before or after age 65.years, they have $2,000 per year in qualified medical
Your HSA contributions won't affect your IRA limitsexpenses, and they get a 12% return on their
-- $3,000 per year or $3,600 for those over 55.  It'sinvestments.  If they withdraw the $2,000 from
just another tax-deferred way to save fortheir HSA each year, they'll have a net contribution of
retirement, with the added advantage being that you$3,450 per year into their account, and they'll have
can withdraw funds tax-free if they are used to pay$248,581 in their account when they begin their
for medical expenses.retirement years.
For early retirees who are healthy, a health savingsIf on the other hand they delay withdrawing that
account can also be a smart option to help lowermoney, they will have $392,686 in their account at
their health insurance costs while they wait for theirage 65.  If they choose they can withdraw the
Medicare coverage.  The older someone is, the more$40,000 to reimburse themselves tax-free for the
they can save with an HSA plan.  For many peoplemedical expenses incurred during that 20 year period,
in their 50's and 60's who are not yet eligible forand still have $352,686 in their account - over
Medicare, HSAs are by far the most affordable$100,000 more than if they had withdrawn the
option.money each year.
Any money you deposit in your health savingsStrategy #3: make the maximum allowable deposit to
account is 100% tax-deductible, and the money inyour HSA at the beginning of each year.  Even
the account grows tax-deferred like an IRA.  Forthough you are allowed until April 15 of the following
2006, the maximum contribution for a single person isyear to make deposits to your HSA, you should take
the lesser amount of your deductible or $2,700.  Inadvantage of the tax-free growth in your account
other words, if your deductible is $3,000, you canby funding it as soon as possible.  The extra interest
contribute a maximum of $2,700; if your deductible isyou can earn by contributing to your account on
$2,000, then that is the maximum.  For families,January 1 of each year rather than the next April 15
maximum is the lesser of $5,450 or the deductible.can amount to over $40,000 in a 20 year period, and
If you're 55 and older, you can put in an extra $700over $100,000 in 30 years.
catch-up contribution in 2006, $800 in 2007, $900 inUsing Your HSA to Pay for Medical Expenses during
2008, and an additional $1,000 from 2009 onward. Retirement
The contribution limit is indexed to the ConsumerWhen you enroll in Medicare, you can use your
Price Index (CPI), so it will increase at the rate ofaccount to pay Medicare premiums, deductibles,
inflation each year.copays, and coinsurance under any part of
How much you accumulate in your HSA will dependMedicare.  If you have retiree health benefits
on how much you contribute each year, the numberthrough your former employer, you can also use
of years you contribute, the investment return youyour account to pay for your share of retiree
get, and how long you go before withdrawing moneymedical insurance premiums.  The one expense you
from the account.  If you regularly fund your HSA,cannot use your account for is to purchase a
and are fortunate enough to be healthy and not useMedicare supplemental insurance or "Medigap" policy.
a lot of medical care, a substantial amount of wealthThough Medicare will pay for the majority of health
can build up in your account.expenses during retirement, there many be expenses
Health savings accounts are self-directed, meaningthat Medicare will not cover.  Nursing home
that you have almost total control over where youexpenses, un-conventional treatments for terminal
invest your funds.  There are numerous banks thatillnesses, and proactive health screenings are all
can act as your HSA administrator.  Some offer onlyexamples of medical expenses that will not be paid
savings accounts, while others offer mutual funds orfor by Medicare, but that you can pay for from your
access to a full-service brokerage where you mayHSA.
place your money in stocks, bonds, mutual funds, orLong-term care is assistance with the activities of
any number of investment vehicles.  daily living, such as dressing, bathing, or feeding
One of the biggest advantages of retirementyourself.  It can be provided in your home, a
accounts like HSAs are that the funds are allowed toretirement community, or a nursing home. 
grow without being taxed each year.  This canLong-term care expenses can be paid for using funds
dramatically increase your return.  For example, iffrom your HSA, and long-term care insurance can
you are in the 33% tax bracket, you would need aeven be paid for from the HSA up to the following
15% return on a taxable investment to match amaximum annual amounts:
tax-deferred yield of only 10%.- Age 40 or under: $260
As another example, if you are in a 33% tax bracket- Age 41 to 50: $490
and were to invest $5,450 each year in a taxable- Age 51 to 60: $980
investment that yielded a 15% return, you would- Age 61 to 70: $2,600
have $312,149 after 20 years.  If you put that same- Age 71 or over: $3,250
money in a tax-deferred investment vehicle like anTo establish a health savings account, you must first
HSA, you would have $558,317 - over $240,000own an HSA-qualified high deductible health insurance
more.plan.  Compare HSA plans side by side to determine
Because catch-up contributions are allowed only forthe best value to meet your needs.  Once you have
people age 55 and older, if one or both of you areyour high deductible health insurance plan in place, you
under age 55 you should establish your HSA in thecan open your Health Savings Account with the
older spouse's name.  This will allow you to capitalizefinancial institution of your choice.