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Hi. This is Dave Zaegel.
Let’s talk about health savings accounts.
We’ll talk about what they are and how they can really benefit you if you’re able to use them.
We’ll also contrast them with IRA accounts.
We’ll show you a comparison to see how they match up with retirement savings because you can actually use a health savings account for some significant retirement benefits.
So first, a health savings account allows you to set aside money in a specific account to pay for healthcare expenses.
The nice part is there’s a lot of tax benefits that we’ll go over, but before you go finding a health savings account and dumping a bunch of money in there, first you need to go and make sure that your health insurance coverage allows you to use a health savings account.
You have to have a high deductible, that’s for sure.
You must have a high deductible to use a health savings account.
But there’s a lot of other rules that you don’t necessarily need to know.
We’re no going to go over them all.
But depending upon the plan, how the plan is designed will either allow you or not allow you to use a health savings account.
Again, you don’t have to know the rules.
Just go back to your health insurance plan, see if it’s compatible with a health savings account.
If it is, you’re in luck and you can use some of these strategies because what happens is, when you put money into a health savings account, you get an immediate tax deduction that year.
Plus, everything in the health savings account grows without being taxed.
And then, when you use the money to pay for the healthcare expenses, you’re not taxed on taking that money out to pay for healthcare.
So you’re getting a win on both ends, where you get a tax deduction up front and then also, you’re not taxed later when you use it for medical expenses.
So how does that tie in to comparing to IRAs?
First, we’ll go over the two IRA types.
You have a traditional IRA, and you have a Roth IRA.
In a traditional IRA, what happens is you get a tax deduction in the year that you make the contribution to the IRA.
But then, you are taxed when you take the money out in retirement.
Also, there’s an age requirement for you to take it out without paying any penalty.
You have to be at least age and a half to withdraw the money without paying a penalty.
A Roth IRA is exactly the opposite.
So you don’t get any tax deduction in the year that you make the contribution, but when you take it out in retirement, it’s grown and grown and grown over the years, and you get to take that money tax free.
So it’s a huge benefit.
You don’t get all the benefit up front, but you have no tax when you take it out in retirement.
It also has an age requirement of and a half.
So let’s circle back to the health savings account that we talked about earlier.
You get the tax deduction when you contribute the money.
Plus, if you take it out to pay for medical expenses, you’re not taxed on that distribution.
Plus, there’s no age requirement.
You can do this whenever.
You do have to have, again, an insurance plan that allows you to make the contributions to the health savings account, but what plan you have when you make the distribution to pay for medical expenses does not matter.
So when we look at these three compared, what you have to stop and think about is, in retirement, you’ll probably have some medical expenses.
It’s a good chance that you’ll have some medical expenses to pay for.
And there’s no restriction on carrying the extra money in your account all the way into retirement.
So what you can do is use the health savings account as a retirement tool where you get the benefit now of a deduction, and you can take the money out in retirement tax free. And you can have it growing tax free this entire time.
So something to think about.
It’s not necessarily saying, “Don’t contribute “to IRAs,” but if you have access to a health savings account and you want to use that where you can have a benefit now if you need the medical cost.
But if you don’t have the medical cost and you can let this run for a while, you can also use that money in retirement and be getting a double benefit by getting a deduction up front and the ability to not be taxed later on.
I hope this helps.
If you have any questions, leave me a comment or just reach out to me directly.