HSA The New ‘Medical IRA’

If you haven’t heard of a medical IRA, you’re not alone – because that account type does not really exist. A “Medical IRA” is a term for an investment strategy that uses a Health Savings Account (HSA) to not only save on taxes, but also build assets that can pay for medical expenses in retirement. When used wisely, HSAs can be a very powerful tool for long-term financial planning.

What is a Medical IRA?

The medical IRA strategy centers on contributing to an HSA and investing the balance for the long-term. Contributions are tax-deductible and investment earnings are tax-free. If the account balance grows and medical costs are paid out-of-pocket, the HSA can accumulate for tax-free medical withdrawals in retirement. Qualified expenses can include deductibles, copayments, Medicare premiums, some or all of long-term care insurance premiums, and prescriptions.

Who Should Consider a Medical IRA?

The strategy is most effective for persons in high tax brackets who have the financial resources to pay medical costs out-of-pocket during working years. By utilizing an HSA wisely, individuals can not only save on taxes but also build a valuable asset for medical expenses in retirement, making it a powerful tool for long-term financial planning.

To contribute to an HSA, your health insurance must be through a high-deductible plan, which generally means your monthly premiums are lower but your out-of-pocket may be higher until you reach the deductible. This increases the need for financial responsibility and savings as you may bear a greater portion of costs before coverage kicks in. Some people may be less likely to seek routine and preventative care if they anticipate substantial expenses for services. These dynamics underscore the importance of maintaining your overall health and understanding the financial impact of a high-deductible plan compared to other options.

What are the Benefits of a High-Deductible Health Plan?

The major downside of high-deductible health plans is that it demands a higher risk tolerance for unexpected medical expenses. But there are many benefits to high-deductible health plans that should be taken into account.

  • The lower premiums associated with high-deductible plans can lead to cost savings over time, particularly for individuals or families with minimal healthcare needs.
  • Your employer may contribute to an HSA on your behalf.
  • The ability to contribute to an HSA provides a tax-advantaged way to save for future medical expenses, potentially offsetting the financial impact of higher deductibles.
  • There are no income limitations on HSA use, whereas high earners are often prohibited from other tax-advantaged vehicles like deductible IRAs or Roth IRAs.
  • HSAs offer flexibility and portability, allowing individuals to carry over unused funds from year to year. Unlike an FSA (flexible spending account), an HSA is not “use it or lose it.”
  • The long-term savings potential can serve as a valuable financial cushion in retirement, mitigating the risk of unexpected medical costs and providing peace of mind.

While it’s generally not advisable, you can also withdraw funds from an HSA for non-medical expenses after age 65 without penalty. However, these withdrawals will be subject to income tax, similar to withdrawals from a traditional IRA. The potential tax-free compounding advantages through an HSA can yield significant benefits in the long run.

A Heritage advisor can help you evaluate if you are maximizing the benefits of an existing HSA or how one might fit into your financial needs and goals.

Additional Resources:

Can I Make a Deductible Contribution to my HSA?

Will the Distribution From My HSA Be Tax and Penalty-Free?

Will Healthcare Change As I Transition Into Retirement?

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