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Your Health Savings Account can be a stealth IRA

Generally, people don’t think about a Health Savings Account (HSA) as a savings account. The HSA was intended to be a tax-advantaged account to pay for medical expenses, but in certain ways it’s better than an IRA.

An HSA is a tax-preferred investment account with triple tax advantages. Your money isn’t taxed when it’s contributed, as it grows, or when you spend it on qualified expenses. It’s the only tool that allows you to contribute tax-deductible dollars and take them back out tax-free.

Unlike flexible spending accounts, there’s no “use it or lose it” provision, meaning the account can continue to grow and gain value.

In order to open an HSA, you must be enrolled in a High Deductible Health Plan. For 2019, this is defined as one with a deductible of at least $1350 for an individual or $2700 for a family.

The 2019 contribution limits are $3500 for an individual and $7000 for a family. If you’re over 55, you can add $1000 in catch-up contributions. (That’s better than the limits on traditional or Roth IRAs.)

Plus, unlike IRAs, there’s no income limit on deducting contributions to an HSA. Your contributions remain deductible no matter how much you earn.

An HSA combines the tax benefits of a Roth IRA and a traditional IRA in one sheltered account. If you don’t use the money, it can continue to grow tax-free.

If you withdraw money before age 65, you must use it to pay for qualified medical expenses. Otherwise, you’ll be subject to income tax and a 20 percent penalty.

However, once you reach age 65, you can withdraw money for any reason. At that point, you can continue to use your HSA funds for medical expenses and avoid taxes, or you can withdraw funds for other purposes and pay income tax on the amount. Essentially, you have the option to treat it like a traditional IRA once you reach 65.

Considering your expected health care costs in retirement, an HSA may be a better savings tool than other options. Talk to an advisor about adding it to your financial strategy.

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