Chris Henderson AAMS?

Vice President, Investments

Wedbush Securities, Inc.

14851 N. Scottsdale Rd. #201

Scottsdale, AZ 85254

480-778-8572

Health Savings Account – Your Medical IRA

According to a recent Fidelity study a 65 year old couple retiring in 2012 will spend an average of $240,000 on medical expenses through retirement, a number that is rising dramatically faster than the pace of inflation. In fact, medical expenses have outpaced inflation for the last 20 years and are expected to continue in the years ahead. Some industry experts predict that costs will rise as much as 15% annually, doubling the cost of healthcare in just five years.

Unfortunately, traditional financial planning fails to distinguish between different types of retirement expenses, such as living expenses, debt payments, and medical costs, planning instead that the majority of one’s retirement savings should be in qualified, tax-deferred accounts. This can lead to larger distributions from your retirement accounts causing bigger tax obligations in the event of an unexpected health problem. The use of an HSA would allow for these problems to be paid for with tax-free dollars.

Let’s assume a 65 year old retiree in the 25% tax bracket incurs $10,000 in unexpected medical expenses that aren’t covered by Medicare, forcing him to take the funds from his IRA. Not only has he depleted his retirement savings by $10,000, he also increases his tax bill by $2500, a to tal hit of $12,500 for the year. Imagine the net effect that would have on a portfolio experiencing a down year!

Now let’s assume the same retiree had $100,000 in a health savings account. He could withdraw the $10,000 tax-free from his HSA leaving his IRA intact and avoiding the $2,500 tax obligation.

While there is no guarantee that you will encounter major home or auto repairs, or other unexpected major expenses, you can be certain you will have medical costs. Why not plan properly for them?

Since being signed into law in 2004, health savings accounts or HSA’s have become increasingly popular with healthy working individuals. HSA’s are financial accounts that are designed to help individuals save for future medical expenses. There are four federal requirements to be eligible for an HSA.

1) The individual must be covered by a high deductible health plan; for 2013 participants must pay the first $1,250 of medical expenses ($2,500 for a family) before coverage begins.

2) Individual cannot be covered by another plan, such as a spouse’s.

3) Must be under the age of 65.

4) Cannot be claimed as a dependant.

Health savings accounts allow for tax-deductible contributions into an account that will grow tax-deferred, and if used for medical expenses may be withdrawn tax-free, a triple tax benefit combination that cannot be beat!

The contribution limits for 2013 are $3,250 for an individual and $6,450 for a family, with a catch-up contribution of $1,000 if you are over the age of 55 (these limits adjust each year for inflation). Even better is that the account is self-directed and can be invested where the account owner chooses and at his/her discretion. HSA’s are like personal savings accounts, but the money in them can only be used for health care expenses. You, not your employer or insurance company, own and control the money, making it transferrable if you change jobs or retire.

If funds are used before the age of 65 for non-medical purposes you will incur a 10% penalty as well as current taxes on the amount withdrawn. If the funds are used for non-medical purposes after the age of 65 you will only be required to pay taxes on the amount withdrawn, but you still got to take advantage of an “above the line” tax deduction (a deduction before arriving at your Adjusted Gross Income) and tax-deferred growth. Since there are no income restrictions on a health savings account, anyone who participates in an HDHP is eligible.

Unused funds of an HSA may be rolled over year after year allowing for compound, tax-deferred growth, and you can delay withdrawals for as long as you want. For instance, while working you can pay the claims out of pocket and at retirement take a tax-free lump sum to reimburse yourself.

Health savings accounts can be used to pay for many services not covered by Medicare or other health plans such as;

· Skilled nursing and rehabilitative care

· Personal care assistance

· Alternative medicine – acupuncture, chiropractic

· Elective cosmetic surgery

· Vision, hearing, dental, and foot & ankle

· Private hospital rooms

· COBRA payments

· Private health insurance premiums

· Medicare premiums and co-pays

As the famous quote states, “Two things in life are certain; death and taxes”. We can add rising medical costs as well. If we know there will be medical costs in retirement why pay them with taxable income when it could be done tax-free?

Over a 20 year period, a yearly contribution of $6,250 growing at 5% would be worth almost $225,000, enough to help bridge the medical expense gap and remove the burden of unexpected medical costs.

One last important note; when used correctly, to pay for medical costs, the income withdrawn is tax-free and will have no effect on your Social Security benefits. Excess distributions from your qualified retirement accounts, IRA’s & 401k’s, could affect certain retiree benefits by raising your taxable income.

Health savings accounts are easy to set up and fund. Many banks, brokerages, and fund companies offer a simple application process and will often deduct contributions directly from your pay.

If you have any questions feel free to contact me at or 480-778-8572.