Sometimes there are ways to boost your retirement saving without investing in your 401(k).
For some, it means investing in their business or any number of individual retirement accounts (IRAs) or small-business pension plans.
What if you have a high-deductible health insurance plan, which is usually accompanied by a Health Savings Account (HSA)?
According to financial planner Barry Kaplan, who's chief investment officer for Cambridge Wealth Counsel in Atlanta, you can use the HSA as a savings vehicle. New research shows it may even be better than a 401(k).
An HSA was created as a companion to the high-deductible (HD) plan.
The logic behind the HSA is that you could tuck away money for health care expenses on your own because the HD policies wouldn't cover out-of-pocket costs up to certain limits.
For example, I have a "catastrophic" health policy that has a $7,000 deductible. When I opened the plan I had an HSA. Although I've long closed the HSA -- it made more sense for me to pay expenses directly -- it's still a good idea.
Here's how HSAs work:
1) When you deposit money it grows tax deferred and you get a tax deduction for the contribution.
2) You don't pay any taxes on the money unless it's withdrawn for non-health-related reasons, at which point you'd pay federal income tax on the proceeds.
3) You can also use HSA dollars for things like vision and dental care.
4) There are limits as to how much you can put into an HSA every year. According to HSACenter.com:
- HSA holders can choose to save up to $3,350 for an individual and $6,650 for a family in 2015.
- HSA holders 55 and older get to save an extra $1,000 which means $4,350 for an individual and $7,650 for a family) - and these contributions are 100% tax deductible from gross income.
- Minimum annual deductibles are $1,300 for self-only coverage or $2,600 for family coverage.
- Annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) cannot exceed $6,450 for self-only coverage and $12,900 for family coverage.
Of course, there's nothing in the law that prohibits you from using HSA proceeds for retirement at a later age.
Like 401(k) withdrawals, you will be taxed on the withdrawals. But in the interim, you get tax-free compounding and get to write off contributions.
Better yet, unlike a Roth IRA, which taxes contributions (not withdrawals), an HSA could prove to be a better vehicle, Kaplan notes:
"Think of it as a Roth on steroids; its like a Roth in that appreciation and withdrawals (for medical expenses in this case) are tax exempt, but the icing on the cake is that your contribution is also deductible.
You should fund your 401(k) up to the match, then stuff your H SA, then go back to the 401(k). Additionally, use your wallet and not your HSA to pay for out of pocket medical costs. If you use it to pay for expenses now, you are giving up the tax free appreciation."
Yet like all tax-advantaged vehicles, though, there's always a devil in the details.
You could, for example, choose a bad vehicle for your HSA savings such as an actively managed mutual fund. That would drain your investment.
It also wouldn't make any sense to invest your HSA contributions in tax-free municipal bonds, since you're already getting a tax benefit going into the account.
My choice would be to find exchange-traded funds for your HSA. They are the cheapest way to invest.
Pick a mix of stocks and bonds. Choose a higher percentage of bonds if you're more conservative.
When setting up an HSA, you will have to go through a company that acts as an administrator. Make sure they offer low-cost index funds. Kaplan likes Health Savings Administrators, which offers 22 Vanguard funds.
What if you needed to tap your HSA for medical expenses?
Then the story gets even better. You can withdraw money from your HSA tax free. But if you leave the money in the account, you can tap the money at a later date.
