Sock Away More in HSAs

By Kevin McCormally

Worried about health-care costs in retirement? A new law passed by Congress in the waning days of the last session could make it easier to turn a health savings account into a pile of money to pay for medical bills down the road.HSAs are tax-sheltered savings accounts that go along with high-deductible health-insurance plans. Money you contribute to an HSA can be deducted on your tax return (or if your employer contributes to your account, the money is tax-free), and withdrawals are tax-free if used to pay medical bills, including Medicare Part B and long-term-care premiums.

In the past, annual contributions to HSAs were limited to the amount of the deductible on the accompanying health plan. Congress removed those caps, meaning that you can fund your HSA with as much as $2,850 if you're single and $5,650 for a family, even if the deductible is lower. (If you're 55 or older, add $800 to the limit.) Unused money can roll over from year to year, so an HSA user can build up a cash stash to pay future medical bills.

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HSAs are usually invested in fixed-rate assets or mutual funds. Say you're 55, and contribute the maximum $6,450 in an HSA for ten years (the caps are expected to rise each year) until you're eligible for Medicare. If you didn't use any of the money to pay medical bills during the decade, your account would hold nearly $77,000, assuming a 4% annual return on your investments. Once you hit age 65, you can use the money for nonmedical expenses, but you will pay income taxes on the withdrawal. (To calculate future savings, visit www.hsabank.com, click "Calculators," click "Future Value Calculator.")

Besides raising the deductions for contributions, Congress changed two other rules. If your health plan has an accompanying flexible spending account, you can now roll money from that plan tax-free into an HSA, up to the annual contribution limits.

Also, the new rules let you fund an HSA with IRA money. You can make a once-in-a-lifetime tax-free transfer of assets (up to the annual maximum contribution) from an IRA to an HSA. This must be done before you sign up for Medicare because you can't contribute to an HSA after that.