Interesting HSA Strategy
The Health Savings Account, or HSA was introduced in 2003 and has revealed itself to be a solid choice in saving money on health insurance. Beyond the obvious saving advantage that comes from empowering consumers to pay for most of their everyday medical expenses, the HSA also has a hefty tax benefit. HSAs are free from federal tax when accumulating, compounding and distributing money (although some states, like California do tax it). Of course, the tax benefit is only when using the HSA for qualified medical expenses. After the beneficiary turns 65, non-qualified distributions are taxed at the normal tax rate, just like a traditional 401(k) or IRA.
One interesting strategy available to HSA users is a form of tax arbitrage. Assuming the expenses would otherwise be taxed at a later date, the worker could pay all of their expenses post-tax. The account would then compound over the years as the worker approached 65. Once 65, the account would solely be used for medical expenses, tax-free. If the primary owner of the account dies, the account can be passed to a surviving spouse tax-free. Any large medical expenses that cause cash flow problems can be reimbursed in an emergency. Also, medical expenses not reimbursed could be ‘booked’ in order to later withdraw in a lump sum if needed.
An example of this strategy in action would be (assume 4% growth, and $3,000 deposits and medical expenses per year, all inflation adjusted to speak using today’s money):
Book $30,000 in medical expenses in a 10-year period. The contributions in that time would grow to $36,018.32 in today’s money. You could then reimburse yourself $30,000, booking $6,018.32 in returns.
I’m interested on your thoughts on the strategy… A similar strategy discussed in some detail can be found here: http://www.health–savings–accounts.com/newsletter-issue-3.htm
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