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Saving Your Health Savings Account for Retirement

Health savings accounts are a means for those with a qualifying high-deductible health plan (individual deductible: $1,350, family deductible: $2,700; maximum out-of-pocket: single $6,650, family $13,300)
 to save for both current and future health expenses. Unlike any other savings vehicle, they are largely appealing for the triple tax benefit they offer: contributions are tax-deductible, the interest and/or earnings grow tax-free, and account owners may make tax-free withdrawals for qualified medical expenses (expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision).

Not to be confused with health care flexible spending accounts (FSAs), which only allow you a maximum year-to-year carryover of $500, health savings accounts (HSAs) not only allow you to carry over your balance from year-to-year, they can also be transported from employer to employer. Accounts are held with a trustee or custodian, which may be a bank, credit union, insurance company or brokerage firm that typically offers mutual funds as investment vehicles.

Use the following strategies to get the most out of your HSA:

Retirement Account in Disguise

An HSA can be ideal for individuals or families who don’t typically have high out-of-pocket health care expenses. For those individuals, it is recommended to consider enrolling in an HSA-eligible, high-deductible health plan if available, and contribute the maximum amount allowed annually. For 2018, this amount is $3,450 for an individual and $6,900 for a family, with a $1,000 catch-up contributions for those 55 or older.

Ideally, the goal would be to use the account strategically and allow it to accumulate and grow tax-free over the years rather than spending it on routine annual health expenses. Doing so will allow your HSA to act as a "Roth-like" retirement account that can be used tax-free to pay for the potentially high cost of medical expenses in retirement.
 (For related reading, see: HSA Strategies for Different Life Stages.)

Alternatively, in the event you are fortunate to be healthy in retirement, once you turn age 65 you can take penalty-free distributions for non-health expenses from your HSA, but those withdrawals will be taxed at your marginal tax rate.

Fund Your HSA with an IRA

It can be challenging to have the funds available to make the annual HSA contribution. After funding a 401(k) and covering other expenses, finding available funds can be difficult. One word of caution is not to be over-zealous to fund your HSA and overlook other goals, such as having an adequate emergency fund and maximizing contributions to other retirement accounts.

There is a little-known IRS statute that allows individuals to make a one-time (lifetime) rollover from an IRA to an HSA. The distribution must be less than or equal to your maximum annual HSA contribution and cannot come from a SEP or SIMPLE IRA.

Rolling money from an IRA into an HSA turns tax-deferred dollars into tax-free withdrawals for medical bills. But in general, it is better to fund your HSA with new funds rather than rolling retirement assets. For one, you’ll maximize the tax breaks if you contribute new money to the HSA.

In addition, it is not always recommended to raid your retirement account for other expenses besides retirement. One exception to this thought would be if you a have large, unexpected medical expense and do not have the funds to cover it. In this event, rolling money from your IRA into your HSA would make sense.
 (For additional information, see: Investing in an HSA.)

As you near retirement age and have a properly funded retirement, it may make sense to consider an IRA-HSA rollover to quickly fund your HSA to cover potential future health care costs tax-free. If the situation is right, a qualifying HSA funding distribution is an excellent way to fund an HSA when other funds are not available to make a regular HSA contribution.

Be careful to follow the rules if you use this strategy. You must be covered by a high-deductible health plan to make such a transfer. The money also needs to move directly from the IRA to the HSA.

Pay Now and Reimburse Later

As you incur unreimbursed, out-of-pocket medical expenses throughout the years, it is important to hold onto those receipts. For those of you who are good recordkeepers, the IRS will allow you to reimburse yourself penalty and tax-free with distributions from your HSA years later. That later time can be 30 or 40 years in the future, after your HSA money has grown tax-free.

One note of caution on the record keeping side: Keep good records to demonstrate the medical expense was never reimbursed and you didn't deduct it on your taxes.

While it may be easier on your budget to pay current medical expenses with the funds in your HSA account, it can be even more beneficial to let the money grow while you are still working and use the funds after your retire.

(For more from this author, see: Exchange Annuities or Insurance for Long-Term Care.)