Health Savings Accounts-More Powerful than an IRA 8/12/07

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Health Savings Accounts-More Powerful than an IRA 8/12/07

Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC

Health Savings Accounts-More Powerful than an IRA


“Health Savings Accounts- More Powerful than an IRA”


Everyone knows that healthcare costs continue to soar with no end in sight.  Many people blame the physicians and are all too happy when the insurance companies cut reimbursements to doctors.  But, the doctors are in fact the good guys, dispensing healthcare to both those who can afford it as well as those who cannot.  Many have also provided significant contributions to advanced medical technology through our many research universities throughout America.  In fact, advancing medical technology is the primary cause of rising healthcare costs. These new advances are often very costly but as healthcare consumers, we demand the very best medical care possible. One strategy for reducing healthcare costs may be to set up a Health Savings Account.

Health Savings Accounts (HSAs), introduced as part of the Medicare bill passed by President Bush in December 2003, are designed to help people save for future out-of-pocket healthcare expenses on a tax-free basis.  HSAs represent an alternative to traditional health insurance.  The basic requirements are that you choose a High Deductible Health Plan (HDHP) which typically is offered at lower premiums that traditional health plans.  This ‘savings’ can then be invested on a tax deductible basis; grows tax free; and allows you to make tax-free withdrawals to pay for out-of-pocket qualified health expenses.  Here are some of the key elements of HSAs:

  • To be eligible for a HSA, you must first establish a High Deductible Health Plan (HDHP).  The deductibles for these plans are designed to dovetail with the allowed HSA contribution limit.
  • For 2007, the contribution limit for an individual is $2,850 and for a family it’s $5,650.  If you are age 55 or older, you can contribute an additional $800.
  • You control the HSA investment account and can invest as you wish.
  • Contributions are fully deductible for both federal and state income tax purposes.
  • Earnings on your HSA grow tax deferred.
  • Withdrawals to pay for qualified medical and healthcare expenses are tax-free.
  • Unlike IRAs and other retirement plans, there are no required minimum distributions from an HSA account.

One concern is what happens to your money if you don’t need it for medical expenses?  First, after age 65, you can withdraw your money from your HSA at any time for any reason and those withdrawals will be taxed as ordinary income (like an IRA withdrawal).  If you die with money left in your HSA, you can either designate your spouse as the beneficiary and he or she will ‘rollover’ the HSA account into his or her name or you can leave it to heirs as part of your estate and they will owe income taxes (and perhaps estate taxes) on the money received.

I should note that contributions to your HSA are in addition to any contributions to retirement accounts such as IRAs, Roth IRAs, or 401(k) plans.  You should consider your HSA as an additional source of retirement funding knowing that to receive the maximum benefit, withdrawals should be used to pay qualified out-of-pocket medical expenses.  For more information about HSAs, go to the Resource Center at and click on Health Savings Accounts (HSAs).