American Dream

How to Save on Taxes and Build Retirement Income With a Health Savings Account

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With the Affordable Care Act in full swing, the number of Americans with high-deductible health plans is on the rise. But one benefit to these plans is that many are eligible for tax advantages through a health savings account (HSA). This type of account provides tremendous opportunities for those looking to grow their wealth.

What Is a Health Savings Account?

Health savings accounts are designed to help consumers with higher out-of-pocket health care costs associated with high-deductible health plans. To be HSA eligible for 2015, your health insurance plan must have a minimum deductible of $1,300 per individual or $2,600 for family coverage. Some policies on state exchanges are not well marked, so check with your insurance company on whether your plan is eligible. Once the right plan is in place for eligibility, policy holders can open an account at any financial institution that serves as an HSA custodian.

Triple Tax Advantages

Once the HSA is established, account owners can contribute up to the allowed maximum of $3,350 for individuals or $6,650 for families in 2015. Contributions made through your employer are pretax, but on your own, they can grow tax free.

Withdrawals are never subject to income taxes if they’re used for qualified medical expenses. A family in the 25 percent tax bracket, for example, could save about $1,600 per year in income taxes by maxing out HSA contributions.

Unlike flexible spending plans, HSA money is never “use it or lose it.” It does not have to be used within a certain time frame, and the unused balance of the account plus any interest rolls over from one year to the next.

Nest Egg for Retirement

Many people only contribute to an HSA when they have a qualified medical expense. Accounts usually come with checks or a debit card, or you can make payments through other means and then reimburse yourself from the HSA. This method offers immediate income tax savings.

However, the real benefit of HSAs comes when families are able to cover out-of-pocket medical expenses in cash. Since there is no time limit on reimbursement for out-of-pocket health care expenses, people with HSA plans can keep track of their medical spending and save receipts. And they can wait to withdraw money until years later.

Since the average American who retired in 2014 will need $220,000 for health care costs, having a fully funded HSA provides tax-free money for those expenses.

HSA Penalties

It’s important to make sure that the money you contribute will only be used for health care. If your HSA is used for anything other than qualified medical expenses, withdrawals are subject to regular income tax plus a 20 percent penalty. There’s an exception to that rule, however: account holders over age 65. Once you’ve turned 65, HSA money can be withdrawn for any purpose without penalty, although regular income tax does still apply for nonmedical expenses. You’re also not allowed to make contributions once you’re enrolled in Medicare.

With so many advantages, including immediate tax breaks and tax-free money for retirement health care costs, a health savings account can be a great resource for families who qualify.

Kim Parr is a private practice optometrist by day and financial writer/blogger by night. She lives in Southwest Colorado with her husband and daughter who all share a love of travel, the outdoors, and finding ways to earn passive income to retire early. Her writing has been featured on Business Insider, Life Hacker,  Mint, and