One of the age-old myths of retirement planning is that your taxes will be so much less when you’re retired that they will not be as serious a planning issue as when you were working. This has certainly been part of the selling of 401k/403b and IRA tax-deferred accounts.
There are, however, a few tax-traps tailor-made for retirees. Consider that withdrawals from traditional IRAs and 401ks are taxed as regular income. But that withdrawals from HSA’s (Health Savings Account) are tax-free when spent at any age on qualified medical benefits. And, once you are 65, are simply taxed as regular income like an IRA if spent on other things like food, shelter, and clothing. So you have nothing to lose from funding an HSA, and plenty to gain.
Qualified medical expenses include Medicare premiums and long term care insurance and expenses. If you can pay big ticket items like long term care with tax free dollars, you could save 25% by not having to pay those taxes. A $60,000 HSA could save you $15,000 during retirement.
So you fund an HSA to the max! Probably not the biggest and most important move you should be making to prepare for retirement, but you will have medical expenses when you’re retired. Take the advantage where you can.
There are some provisos (see IRS Publication 969 for the whole story):
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- You must be covered by an eligible High Deductible Health Plan ($2,400 family deductible, $11,900 max out-of-pocket)
- You can’t contribute beyond age 65, so act now before April 12, 2012 to make a 2011 contribution
- Your employer’s contributions reduce your annual contribution limit (but thank them anyway!)
- Total contributions for 2011 if you have HDHP family coverage is $6,150 plus $1,000 per spouse over 55
If you don’t have an HSA account, you can start one if you qualify, much like you would open an IRA account. Health Savings Administrators, for example, allows you to invest your account funds in low-cost Vanguard index funds.