Health Savings Account – A second retirement plan?

Jan. 21, 2014
With tax rates increasing, many doctors are scrambling to find additional ways to reduce their taxable income. Unfortunately, many individual tax deductions have been phased out ...

By John K. McGill, JD, CPA, MBA, and Jeffrey A. Harrell, CFA

With tax rates increasing, many doctors are scrambling to find additional ways to reduce their taxable income. Unfortunately, many individual tax deductions (i.e., itemized deductions) have been phased out or eliminated under new tax legislation. Often overlooked, contributions to a health savings account (HSA) remain a very attractive option. An HSA is a triple tax-advantaged (tax-deductible contributions, tax-free growth, and tax-free withdrawals) savings account that can be used to pay for qualified health-care expenses. If used correctly, these accounts can save doctors tens of thousands of dollars in taxes and provide for health-care expenses in retirement.

Most doctors will qualify for an HSA if their health insurance is a qualified high-deductible health insurance plan. To be certain, doctors should confirm eligibility with their insurance providers. If the current health insurance plan does not qualify, doctors should request a quote on an HSA-qualified plan, as the annual insurance premiums are typically lower than traditional plans.

When HSAs were created in 2003, they were not designed with a second retirement plan in mind. Yet for many doctors, an HSA offers this unique benefit. In fact, an HSA may be the most lucrative of all retirement savings options due to the triple tax-advantage status. Traditional retirement savings vehicles such as 401(k)s and IRAs offer tax-deductible contributions, but distributions will eventually be subject to ordinary income tax. Conversely, Roth 401(k) or Roth IRA contributions are not tax deductible, but distributions are tax free. The HSA offers the best of both options -- a tax deduction on the contribution and tax-free withdrawals for qualified health-care expenses. Just how valuable is this benefit? According to Fidelity Investment, a 65-year-old couple retiring in 2013 will need an estimated $240,000 for future health-care expenses. Efficiently building a tax-free nest egg to specifically cover these costs can solidify a retirement game plan.

In order to maximize the full potential of an HSA, doctors must pay all of their current health-care expenses with personal funds. This strategy ensures that all contributions made to an HSA will grow tax deferred. Unfortunately, many doctors who establish an HSA also fail to take full advantage of the growth potential by neglecting the account investment options. More often than not, after establishing an HSA, doctors unwittingly leave their contributions in low interest-bearing savings vehicles. Over a number of years, this can result in tens of thousands of dollars in lost earnings. To take full advantage of the HSA, doctors should determine what investment options are available and invest accordingly to generate higher long-term results. If your HSA provider offers limited or poor investment options, consider HSA Bank ( They offer a brokerage option through TD Ameritrade that allows doctors to invest in stocks, mutual funds, ETFs, and more.

In 2013, doctors could contribute up to $6,450 into an HSA if they had family insurance coverage ($3,250 for individual coverage). Additionally, a $1,000 contribution per person was allowed for individuals age 55 or over. If both the doctor and spouse are age 55 or older, a total of $8,450 could be contributed and deducted from their income. Rules prohibit both spouses from contributing the $1,000 catch-up contribution to the same account, so a separate HSA must be opened to maximize benefits if both the doctor and spouse are age 55 or older. In 2014, the contribution limit will rise to $6,550 ($3,300 for individual plans). The catch-up contribution will remain at $1,000 in 2014.

If a doctor makes a withdrawal from the HSA for nonmedical reasons, the penalty can be stiff. Nonqualified withdrawals from HSAs are deemed to be taxable and subject to an additional 20% penalty. Therefore, savvy doctors looking for even more flexibility with their HSA withdrawals should save all of their receipts for qualified health-care expenses incurred after the HSA was established. As long as the doctor can demonstrate the withdrawal from his or her HSA was for a qualified medical expense after the HSA was open, no taxes or penalties will be owed on the withdrawal, even if the expense occurred more than 10 years ago!

John McGill provides tax and business planning services exclusively for the dental profession, and publishes the McGill Advisory newsletter through John K. McGill & Company, Inc., a member of the McGill & Hill Group, LLC. Jeffrey Harrell provides investment advice through Select Consulting, Inc., a registered investment advisor and affiliate of the McGill & Hill Group, a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment management services. For more information, visit

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