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Your Secret Retirement Investment

A Health Savings Account is a terrific tool for covering future medical costs—and avoiding taxes

If used properly, Health Savings Accounts can be a valuable retirement savings tool. Travis Rathbone Do you have health insurance through work, or a nongovernment policy you bought yourself? If so, you might have access to a great you’re not aware of. Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP the Magazine. It’s called a health savings account (HSA). It’s available to roughly 3 out of 10 working-age U.S. adults. And it’s a hidden gem, since many people who have HSAs don’t understand their full long-term potential. Entertainment $3 off popcorn and soft drink combos See more Entertainment offers > Here’s how HSAs usually work: Each paycheck, you put some pretax dollars into an HSA—just as you might with its better-known cousin, the health care flexible spending account (FSA). You can pull money tax-free from either an HSA or FSA to pay for health care, as long as the cash is for approved medical expenses such as doctor visits and prescriptions. That’s how Leon LaBrecque, 62, a financial planner from Troy, Mich., first used his HSA. But then he saw he’d be better off delaying withdrawals until after he retired, thanks to two features of HSAs not shared by FSAs: One, an HSA can hold thousands of unused dollars for years until you need them. And two, money in the account can be invested in , giving it a chance to grow tax-free over time. So when used for qualified medical expenses, HSAs offer a unique triple tax-free advantage for long-term investing: no taxes on contributions, earnings or withdrawals. Not even a 401(k) or IRA can match that. Which can make HSAs a great way to save. Today, LaBrecque covers medical costs with cash on hand, not his HSA. He’s letting the account grow until he retires, after which he’ll start tapping it—ideally, he says, for “sports injuries when I’m 90.” Intrigued? Here’s what you need to know.

HSA basics

To contribute to an HSA, you must be enrolled in an eligible high-deductible health plan, or HDHP. This is currently defined as a health plan with an annual deductible of at least $1,350 for an individual (double that for a family plan). Among employees offered health insurance last year, 57 percent had an HDHP as an option. If you have a single-person HDHP, this year you and your employer can put a combined limit of $3,450 into your HSA ($6,850 for a family plan). You can add an extra $1,000 if you’re 55 or older; a covered spouse 55 or older can save an extra $1,000 to his or her own account. While employer contributions are optional, they average out to $608 for single coverage and $1,086 for families, according to the Kaiser Family Foundation.Your employer may line up an HSA provider to go with your HDHP. If it doesn’t, you can open an HSA at providers like Optum Bank and HealthSavings Administrators. Shop around; fees vary.In most cases, if you have an FSA you can’t contribute to an HSA.Once you enroll in any Medicare plan, you can’t make new contributions to an HSA. You can, however, use HSAs to pay Medicare premiums (but not Medigap)

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