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By Liza Horvath


An Underappreciated Investment Opportunity


Most investors are familiar with the growth potential of an Individual Retirement Plan. IRAs are funded with pre-tax dollars and grow unimpeded by both income and capital gains taxes. The combination of compounding interest in a tax advantaged account make for a powerful financial tool that savvy investors should not overlook. When we withdraw funds from our IRA it is only then that we pay income tax but, presumably, this will take place later in life when we are earning less and are in a lower income tax bracket.


What if I were to tell you that there is an additional investment that can grow pre-tax dollars, free of income and capital gains tax but, even better, one that does not require that you pay income tax on the funds you eventually use?  


This “magic” account is the Health Savings Account. If you are enrolled in a high-deductible health plan, you can set up an HSA and fund it with up to $7,550 (for individuals 55 and older) annually. Note that this amount is larger than the amount you can contribute to the common IRA. HSA funds can be used to pay your health insurance deductible or for other medical expenses not covered by insurance. When you use the funds for health expenses, you are not required to pay income tax on the amounts used. Triple tax savings!


Terrific, you say, but how can I make money if I am using the funds for health care? Here is the amazing thing about these accounts - you are not required to use the funds so, year after year as you make contributions, the funds begin to add up and can be invested in the stock and bond markets. According to the January issue of Forbes magazine, 9 million Americans are stuffing their HSA accounts, not taking withdrawals and many of these accounts have more than $100,000 in assets!


To make the most out of this investment opportunity, take note of the unique characteristics of the account. One distinctive option is the “retroactive claim” opportunity. As you grow your account, instead of using these funds to pay medical expenses, you pay the bills out of pocket - keeping track of the paid expenses along with the receipts. Later in life you can “cash in” these paid expenses - retroactively. For example, say this year you have uncovered medical expenses of $3,000 and pay them out of pocket. Then, in the future, you have a medical bill for $5,000 which comes at a time when you are not quite so flush with cash. You can “cash-in” your $3,000 receipt and withdrawal an additional $2,000 to pay off the $5,000 doctor’s bill. The plans allow you to make a retroactive claim on your account and, best of all, when the funds are used for medical bills, you pay zero income tax!


There are other attractive features of the HSA so, if you are as one of my clients says, “So healthy that I’m annoying my beneficiaries,” look into an HSA and sock away tax advantaged funds for later use. It may just be the financial tool for you.

Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. If you have a questions call (831)646-5262 or email liza@montereytrust.com










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