HSA's = tax-free retirement account?

May 16, 2007 5:21 PM

Health Savings Accounts (HSA's) ... Can they be used as just another tax-free retirement account after you max out your Roth IRA?

I usually max out my Roth IRA and contribute to a 401(k) ... I just came across this Newsweek article that got me thinking about opening an HSA.
I used to contribute to a Flexible Spending Account and understand that the money in an FSA is lost if not used within a year...
An HSA on the other hand would let me keep that money in there kind of like a Roth IRA correct?
Do I have to be enrolled in a High Deductible Health Insurance policy to be eligible?

I am 22 years old and don't need my medical insurance for anything more than a yearly check-up.

Any advice would be really helpful. Thanks in advance.

posted by MrBCID to work & money (6 comments total)

I'm not sure of all the rules, but I have an HSA provided by my employer, and I know that any money withdrawn from it for any reason other than legitimate medical expenses incurred while participating in a High Deductible Health Insurance policy has a 10% penalty levied against it. If they money wasn't taxed before it was placed in the account, it will also be taxed when withdrawn for non-qualifying purposes. I don't think there are any exceptions to this. Apparently even medical expenses incurred before our insurance coverage started don't qualify for HSA funds.
posted by Vorteks at 5:32 PM on May 16, 2007

I have just started looking into this myself because I've lost money on FSAs in the past. My understanding is the same as yours, and it also seems like "high deductable" applies to most standard employment coverage.

The only downside seems to be that if you're not paying in with employer contributions, you'll have to take the tax savings at filing time rather than having it come out tax-free, which isn't so horrible. The one thing I want to confirm before I do it is that I won't lose my tax savings due to the goddamn Alternative Minimum Tax, which lost me two hybrid tax credits for '06 and now I've learned my lesson.

Now I'm going to have to look into the issue Vorteks mentioned about expenses incurred before coverage began and whether that applies to non-employer-affiliated HSAs. I got laid off last week and while I'm COBRA-eligible, I'd like to know whether I could still use my hypothetical HSA if I was between jobs in the future and had medical expenses.
posted by Lyn Never at 5:45 PM on May 16, 2007

Yes, you do have to be enrolled in a high deductible plan (with a few other minor qualifying requirements) first, and can only invest up to the deductible amount. Which, in my opinion, sucks, since out of pocket cost is usually at least twice the deductible. But I digress.

Let me know if you find an HSA that has a rate of return that even keeps up with inflation. The few that pay more than 1-2% seem to all have fees that eat up the difference. The tax deduction is nice but it's not a vehicle designed for wealth-building. Your retirement fund needs to be growing aggressively.

If you're just looking for tax-advantaged investment opportunities, savings bonds may get you a slightly more bang for the buck.
posted by nakedcodemonkey at 6:00 PM on May 16, 2007

My brother in law is an actuary and he swears by these things. It could be that he gets big fees for setting them up, though. I am marking this q favorite in hopes that someone who really knows how these work will school me. It would be great if there are benefits even for people who have pretty good corporate sponsored insurance.
posted by caddis at 6:26 PM on May 16, 2007

There's not a great solution here. An HSA needs to be in conjunction with a high-deductible health plan. A retiree HRA is all employer money. A retiree Medical Savings Account would be the closest to what your looking for (can be funded with after tax employee dollars, but I'm not aware of anyone offering administration of one for individuals).

It's great that you're 22 and thinking about retirement savings, but I wouldn't tie retirement savings to health care expenses. In 50 years, who knows what retiree medical will look like.
posted by MarkAnd at 5:19 AM on May 17, 2007

As others have said, HSAs can only be opened in conjunction with a high-deductible health plan. Most people who create an HSA do so through their employer. There are many companies offering direct to consumer HSA accounts. I believe Bank of America is the largest group doing so. You may want to talk to them about their HSA plan.

Your annual contribution is limited to your annual deductible. That's $2,200 if you're single, $4,500 for family coverage. Those numbers appear in the enabling legislation.

The money can go in tax free, if it's through your employer. If it's a direct to consumer product you deduct your contribution at year's end. The money earns interest tax free and you can use the funds for eligible medical expense tax free. The current interpretation of eligible medical expenses is pretty broad. You can use it for massages, vitamins, accupuncture, whatever. You can see any doctor you wish as well. You'll even get a debit card to use for medical expenses. It is important to keep documentation on your expenses in case of an audit. (I don't know what audit mechanisms exist at this point.)

Most HSA providers are one stop shops for the medical insurance and financial services. There are some constraints on how the dollars can be invested imposd by the provider, but you can manage the dollars just like your 401k -set the level of risk you're comfortable with, etc. It's not unreasonable to expect returns similar to your other retirement accounts. Money rolls over from year to year. It's your money. however, other than accessing the dollars for medical expenses, the dollars cannot be accessed until retirement - that's a long time for someone your age.
There is some uncertainy and difficulty surrounding what happens to HSA accounts when the participant leaves their employer or elects another health plan option. As of November the law and procedures were a little fuzzy on this front.

HSAs are very new and look to be promising. The health insurance industry is excited about them because it gives the consumer "skin in the game" to manage their health care better than a traditional plan. They expect Consumer Direct Health to be the only growth area in the insurance industry outside of government funded insurance. Projections say 25 million members by 2010.

The financial services industry likes them because they getto compete directly in the health care sector. With the consumer-centered /web-based services banking has been pushing for several years, they're in a good competitive position relative to insurers.
It looks like you can expect several changes in the law every other year for the next ten or so. It's possible the program could go away, but I doubt it. There's no question that there will be a lot of volatility in what's allowed as the laws change.

Again, I'd start my search at Bank of America. I don't know how their product compares to competitors, but I know that they have invested heavily in creating and marketing HSA plans.

I've worked in health insurance for about a year and saw a presentation on HSAs in November. I wrote a proposal weighing if we should add HSAs to our product line and we chose not to. I'm not an expert by any means.
posted by putzface_dickman at 10:28 AM on May 17, 2007