Tuesday, January 8, 2008

Health Savings Account - Another Way to Fund Retirement

The Wall Street Journal ran a piece discussing how health savings accounts (HSAs) are being used by individuals as another way of saving for retirement and not to fund their future healthcare costs but as . Financial services firms and investors are finding that the ability to fund the account tax-free, allowing funds to grow tax-free, and then spent tax-free dollar for dollar on qualified medical expenses aren't the HSAs only attraction. Since dollars in an HSA don't need to be spent on medical expenses and can be withdrawn at age 65, with the funds subject to ordinary income taxes, many instead are using the HSA as another retirement account.

  • "HSAs offer a triple tax advantage," says Bert M. Halliday, a first vice president and senior adviser at Merrill Lynch & Co., who leads a team of financial advisers specializing in these accounts.
  • Money in the accounts can be invested in stocks, bonds, mutual funds and certificates of deposit. Merrill is managing about 20,000 HSAs for clients, mainly doctors, lawyers and accountants, says Mr. Halliday.
  • "It's a great perk" for people approaching retirement, says Betsy Billard, a private wealth adviser with Ameriprise Financial Inc.
  • Maxing out on annual contributions to an HSA can be an astute financial strategy for the well-heeled who can afford to cover any out-of-pocket medical expenses without dipping into their HSA.
  • However, HSAs are less favorable for lower-income unhealthy people because out-of-pocket expenses increase with the amount of health-care services you use, and the tax advantages aren't as great for people in lower brackets. In this scenario, paying more up-front in premiums is likely to be a more cost-effective option.
What's the catch? You need to know when you must get care to stay healthy and when you can safely skip. Unlike auto insurance where a high deductible may prevent you from getting dents or dings fixed for your car, your body doesn't have replaceable interchangeable parts.

It seems more like the HSAs were geared to those in higher income and the current participation seems to reflect that demographic. As HSAs are the focus of many of the Republician presidental candidates as a way of addressing our healthcare crisis, the question is is this the right plan?

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