HSA – the Secret IRA Wealth Builder

Do you want to know the best ways to build wealth for retirement? There are many ways to generate tax-deferred growth to build wealth for retirement. You can max out any of the following accounts: 401k, Roth or Traditional IRA, or Health Savings Account (HSA).

Many contribute to an employer 401k or other defined benefit plan each paycheck. You may also put excess savings into an IRA or HSA. I contribute to a Roth 401k, max out my HSA every year, and Roth IRA if I have anything left over. My preference is to pay taxes now rather than during retirement. Plus, I can use my Roth IRA as an emergency fund if needed.

Unfortunately, most Americans spend more time planning their vacations than their retirement savings. It wasn’t until I began working at Midland that I understood the importance of retirement funds. I came into Midland already knowing 401ks and IRAs existed, but an HSA was new to me. And boy, did it surprise me! Especially the secret IRA opportunity that exists with HSAs.

What Is a Health Savings Account (HSA)?

An HSA is a handy way to save and pay for medical expenses. To qualify for an HSA account, you must have a high-deductible health plan (HDHP). An HDHP has a minimum annual deductible of $1,400 for an individual or $2,800 for a family for 2021. Medicare does not qualify as an HDHP.

The first benefit of an HSA is the deductible contributions. The second benefit is that the earnings grow tax-free. Thirdly, distributions are tax-free as long as they are for qualified medical expenses. This makes HSAs a triple whammy.

Using an HSA account is very simple. You go to the doctor and get a medical bill for $500. You pay the bill with a credit card, and then request a distribution from your HSA for $500. The $500 is tax and penalty-free because it was for qualified medical expenses!

HSA Contribution Limits

TYPE 2020 2021 CHANGE

HSA Contribution Limit (employer + employee)

Self-only: $3,550

Family: $7,100

Self-only: $3,600

Family: $7,200

Self-only: +$50

Family: +$100

HSA Catch-Up Contributions (age 55+)

Self-only: $1,000

Self-only: $1,000

No change

HDHP Minimum Deductibles

Self-only: $1,400

Family: $2,800

Self-only: $1,400

Family: $2,800

No change

No change

HDHP Maximum Out-of-Pocket Amounts (Deductibles, Co-Payments, and Other Amounts)(Does Not Include Premiums)

Self-only: $6,900

Family: $13,800

Self-only: $7,000

Family: $14,000

Self-only: +$100

Family: +$200

What Can I Use an HSA For?

There is an abundance of IRS-qualified medical expenses for which you can use an HSA. Some examples are doctor visits and co-pays, laboratory fees, vaccines, dental cleanings, and many more. Uncommon (but qualifiable) costs include acupuncture, chiropractor services, and medical equipment such as hearing aids or a wheelchair.

Medical Expenses Throughout Retirement

According to Healthview Services,

“In its newest Retirement Healthcare Cost Data Report, HealthView Services explains how choices that even healthy couples make can change their healthcare cost projections from under $200,000 to more than $1 million. For a healthy 65-year-old couple retiring in 2021, total costs for premiums and out-of-pocket expenses will average $662,156. The report also explains that if this couple starts receiving Social Security payments at 65, healthcare expenses will consume 68% of their benefits, leaving far less than many might expect for other living expenses such as housing.”

That is a lot of money in today’s value. For those who are not yet 65, that number will only grow due to inflation and modern medicine as we begin to live longer. If you take funds out of a Traditional IRA to pay for medical expenses, you are at a bit of a disadvantage. You pay taxes when you take funds out of a Traditional IRA. Essentially, the payments you are making for medical expenses are with “after-tax money.”

Advantages of an HSA

Triple Tax Advantage

  1. Tax-deductible. You can deduct the amount you contribute to an HSA to help lower the amount you have to pay in taxes. (Current limits are $3,600 for single people and $7,200 for families)

  2. Tax-deferred growth. Unlike a personal account, growth in an HSA is tax-deferred. You will not have to pay capital gains tax year over year.

  3. Tax-Free and Penalty-Free Distributions for Medical Expenses. Regardless of age, you can take a distribution for qualified medical expenses tax and penalty-free.

No Income Limit Restrictions On Tax Deductions

Some people cannot get a tax deduction on a Traditional IRA or contribute to a Roth IRA because their income is too high. With an HSA, you can contribute and get a tax deduction regardless of how much you make.

HSAs Offer Unique Freedom to Save

The Unknown Benefit of HSAs

Once you reach 65, you can begin taking funds out of our HSA penalty-free for nonmedical expenses. You’ll still have to include what you withdraw for nonmedical expenses as income for the year. Taking nonmedical funds out of an HSA essentially turns the HSA into a Traditional IRA. If you take funds out before age 65 for nonmedical expenses, you will pay a hefty 20% tax penalty. You will also have to include the distribution as income for the year.

Estate Planning Opportunity (No Required Minimum Distribution)

Traditional IRAs have a required minimum distribution (RMD) for those 72 and older. But, HSAs do not currently require an RMD. A few years of extra compound growth year over year can be a big difference!

How Do I Get Started With an HSA?

You may want to review your situation and financial goals with a CPA or financial planner. If you are eligible for an HSA, you may want to consider taking advantage of this tax-deferred growth opportunity and tax deduction.

Midland specializes in self directed IRAs and HSAs that hold alternative investments such as real estate, promissory notes, futures/forex accounts, cryptocurrencies, real estate, and private stock. Midland will be able to hold your investment and do the necessary record keeping and reporting to the IRS that allows you to invest in alternative assets through your self directed IRA.

If you have any questions about HSAs, please contact us at (239) 333-1032. Visit our website for more information regarding the benefits of HSAs.

Author: Andy Anger, Client Services Team Lead at Midland IRA, Inc.

MIDLAND TRUST COMPANY, NOR ITS AFFILIATES OR SUBSIDIARIES (COLLECTIVELY REFERRED TO AS “MIDLAND”), IS NOT A FIDUCIARY: Midland’s role as the Custodian and/or Administrator of self-directed retirement accounts is non-discretionary and/or administrative. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account, and is responsible for conducting his/her own due diligence. Midland has no responsibility or involvement in selecting or evaluating any investment and does not conduct due diligence on any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.

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