Health Retirement Accounts: Pros & Cons
A health retirement account is a type of investment account that allows you to use the money to pay for medical expenses during your retirement years. This is also referred to as a health savings account or a health savings retirement account, in some cases. This type of account is not available to everyone and has some advantages and a few potential drawbacks to be aware of.
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Tax Benefits
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One of the benefits of a health retirement account is that you can make tax-deferred contributions. The money that you contribute will come off the top of your income, before taxes are taken out, so you lower your taxable income for the year by making contributions. This could help you to put aside more money for medical expenses. The returns on the account are also not taxed, which helps the account grow faster.
Convenience
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This type of account is also very convenient. If you are eligible, you should be able open one of these accounts with any bank or with some brokerages or mutual fund companies. The custodian company will give you a debit card or a checkbook that you can use to access the money. When you have a qualified medical expense, simply swipe your card or write a check, and the transaction will be processed.
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Extra Retirement Money
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The ultimate goal of using this account is to build up a large amount of money that you can use for medical expenses when you retire. At the same time, you can also use this money for other purposes once you turn 65. If you take money out of the account for purposes other than qualified medical expenses, you have to pay a 10 percent early distribution penalty. Once you turn 65, the 10 percent penalty does not apply for distributions.
Limited Enrollment
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One of the downsides to this type of account is that it is not available to everyone. it is designed to be used with a high-deductible health insurance plant. If you have an insurance plan with a low deductible, you will not be able to open this type of account. This is commonly the case when you have access to a group insurance plan through an employer. Many self-employed people end up getting a health savings account because they have high-deductible insurance plans and can qualify.
Rules
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When you use a health retirement account, you will also have to abide by the rules set forth by the Internal Revenue Service. You cannot use the funds as you wish without any restrictions. Contribution limits set by the IRS allow a family to contribute $6,150 to a health savings account annually as of 2010. If you want to set aside more money, you cannot do so with this type of account.
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