YOUR RETIREMENT
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Save at work
If you’re still working, your employer may offer an HSA-eligible health insurance plan among its options during open-enrollment season. Do the math to figure out whether it’s the best plan for you. You’ll benefit from lower premiums for the high-deductible plan and lower taxes because your HSA contributions are tax-deductible.
If your company offers a savings account to pair with your high-deductible health insurance policy, it will make administration easier and may cut costs if they subsidize some fees. Your boss might even add some money to the savings account, too. But if you don’t have an HSA option at work, you can open an account on your own (see the box for ways to check out the fees and investment options).
When choosing the investments, decide how you’re going to use the money. Most plans require you to keep up to $1,000 or $2,000 in a money-market account—generally paying 2% to 3% interest—so the money is accessible in case you need it for current medical expenses. But if you have enough cash to pay your health-care costs with other funds, you’ll reap bigger tax benefits if you toss out your HSA’s debit card and keep the money in the HSA for the long haul. In that case, you’ll need investments to match your longer time frame.
Some employer plans are starting to offer mutual fund investment options inside their HSAs. WageWorks, which administers HSAs and other employee-benefit plans for employers, offers a diversified portfolio of funds from Artisan, Dodge & Cox, Harbor, Vanguard and Victory. Keep enough cash in the HSA’s money-market account to cover any emergency medical expenses, then invest the rest as you would in other retirement accounts.
Keep an eye out for better investment options every few years. Fidelity is starting to get into the HSA business, which should encourage more competition for good, affordable investment choices.
Early-retirement solution
Early retirees need more help with medical expenses than almost anyone else. Few have retiree health coverage, and those who search for their own policies can be rejected or charged high prices if they have any medical conditions.
If your employer doesn’t offer retiree health coverage, you may be able to remain on the company plan for up to 18 months under COBRA, a federal law that lets you continue group coverage after you leave the group. But you will have to pay the entire bill yourself—which can be a real shock if your employer subsidized a big chunk of your coverage. The average employee pays $2,713 per year for family coverage, according to the Kaiser Family Foundation. But the average employer pays nearly 75% of the total cost. If you have COBRA coverage, you have to pay the full bill yourself—bringing the average premium up to about $10,880, plus up to 2% in administrative expenses.
If you’re in poor health, COBRA may still be your best bet because you can’t be denied coverage under a group plan. In that case, any money you’ve already set aside in an HSA can come in quite handy. You can use HSA money to pay for COBRA premiums and out-of-pocket costs. And if your employer offers an HSA-eligible, high-deductible COBRA policy, you may still be able to contribute money to your HSA.
If you’re healthy, though, you may get a better deal by buying a policy on your own. Buying a high-deductible plan may be a great way to trim your premiums, and contributing to the HSA can lower your tax bill. If you’re 55 or older, you can contribute an extra $700 to the account in 2006—in addition to the $5,450 for families or $2,700 for individuals.
You can’t use your HSA money to pay health-insurance premiums (except for COBRA coverage), but you can use it to pay your deductibles, co-payments and expenses that aren’t covered by insurance—such as vision and dental care. You can also use it to pay for prescription drugs and most over-the-counter medications for yourself, your spouse and your dependents. For a full list of eligible HSA expenses, see IRS Publications 969 and 502, available at www.irs.gov or by calling 800-829-3676.
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