Planning and saving for retirement is tough.
You have to forego current consumption – despite the endless variety of cool stuff available for purchase – and let your money compound unmolested for years – or decades.
But even then, you have another big hurdle to clear: inflation.
Sure, we no longer have the double-digit rates of the late ‘70s and early ‘80s. But inflation is still out there – like a slow leak in your pool or termites in an antebellum house – detracting from the value of what you own.
Even with the lower rates of the past couple decades, it takes $4,371 today to buy what $2,500 would have bought in 1991.
And some prices – like healthcare and college tuition – are rising much faster than core inflation.
Tuition, of course, is not likely to be a major cost for you in retirement. But that is not the case with medical care.
Healthcare costs are up more than 80% in the last 15 years alone. And you are likely to consume more healthcare services in retirement, not less.
That’s why you should definitely own one of the new “Medical 401(k)s.”
That’s what many financial advisors call the new health savings accounts.
They are a very good deal. Here’s why…
HSAs are medical savings accounts available to any American enrolled in a high-deductible health insurance plan.
Account owners can use them to pay for current out-of-pocket healthcare expenses or let the money compound to pay for future healthcare costs.
Your account will be held by a trustee or custodian, like a bank, credit union, insurance company or brokerage firm. And it offers three separate tax benefits.
- Like your IRA or 401(k), the money you contribute to an HSA is tax-deductible.
- The funds in your account will compound tax-deferred.
- The withdrawals you make – provided they are used to pay for qualified medical expenses – are also tax-free.
You cannot use your HSA to pay health insurance premiums. But you can withdraw funds without penalty for out-of-pocket medical, vision and dental expenses, diagnostic devices, prescription drugs, even over-the-counter medications.
These are not Use-It-or-Lose-It accounts.
If you don’t use all the money in your HSA, you can withdraw the money for nonmedical reasons before age 65 by paying the income tax and a 20% penalty.
Starting at 65, account owners may take penalty-free distributions for any reason. (However, to be tax-free, withdrawals must be used for qualified medical expenses.)
You can even roll your HSA into your IRA or other qualified retirement account when you are ready for Medicare.
There is no minimum required contribution to an HSA. But there are annual contribution limits. For 2016, it’s $3,350 for an individual or $6,750 for a family.
If you are 55 or older, you can contribute an extra $1,000. (Limits are subject to change by the IRS each year.) You can also – once in your lifetime – make a tax-free rollover from an IRA to an HSA to fund it.
Unlike Roth IRAs, you are not disqualified if your income is too high. Even high-income earners are eligible for health savings accounts.
HSAs are quickly becoming the norm with U.S. corporations.
Many employees set up automatic pre-tax payroll deductions. (Some companies even make the health savings account contributions themselves.)
Even if the account is opened through an employer-sponsored program, all money in an HSA belongs to the account owner.
You can take your HSA with you if you change jobs. And you can use it to pay medical expenses well into retirement – and for as long as you live.
Indeed, many HSA owners prefer to use the accounts not to meet current out-of-pocket expenses but to save tax-free for future healthcare costs.
To qualify for an HSA, you need only meet four basic requirements. You have to have a high-deductible health plan (increasingly common thanks to Obamacare), no other non-high-deductible health insurance, no Medicare, and not be claimed by anyone as a dependent
If you qualify, contact your bank, broker or mutual fund company, and tell them you want to set up a health savings account today.
It is an absolute no-brainer.
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Source: Investment U