Benefits of IRAs & HSAs

Money is often said to be incapable of buying two things: happiness, and good health. We understand the sentiment behind these claims, but they are not entirely accurate.

If someone is paying for their living expenses during their golden years with an Individual Retirement Account (IRA), they are happier than they would have been having they continued working to make ends meet. Likewise, a Health Savings Account (HSA) may not pay for the medical treatment they need to achieve perfect health. But, they’ll surely have a better prognosis than if they couldn’t afford more health care.

So, will these two unique types of savings accounts make you happy and healthy? Not necessarily. But they may offer the best chance you have of realizing those two all-important states!

What Is an IRA?

An IRA is a special kind of savings account that is used to make long-term investments. When you create an IRA, it’s guaranteed savings for your retirement.

Several other types of IRAs are available. Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are generally reserved for small business owners. Roth IRAs (named after former senator William Roth) differ from traditional IRAs because contributions are not tax-deductible. But on the plus side, withdrawals from Roth IRAs are not taxed.

As its name implies, an IRA is intended to help Americans save for retirement. That is why early withdrawals (before the age of 59 ½) are typically penalized by 10%, although exceptions may be provided for important purchases such as education or a first home.

What Are the Benefits of an IRA?

• IRAs are convenient. You need only one thing to set up an IRA: taxable income. Outside of that prerequisite, you may open an IRA at virtually any age and with any IRS-approved financial institution. Once you have created an IRA, you may have it managed automatically or take a more active role in its management.

• IRAs offer tax-deferred growth. This is the key benefit to IRAs. In essence, you will not be required to pay taxes on any contributions you make to your IRA until you begin receiving distributions from it. This also means that you may be able to contribute your earnings to your IRA to enter a lower tax bracket. (Note that you will pay taxes on distributions on a traditional IRA, while a Roth IRA essentially flips the taxation requirements around – taxed contributions, tax-free distributions.)

• You own your IRA. A 401(k) has many of its own benefits, but it is ultimately owned by your employer. They can alter their plans and restrict which investments you are able to purchase. Although your employer will not contribute to an IRA, you are more in control of how an IRA is managed.

What Is an HSA?

An HSA is a type of savings account that is optimized for the needs of those who are insured by high-deductible health plans. Either the HSA holder or their employer may contribute to the account. This may be used to pay for medical expenses that would not otherwise have been covered also.

An HSA may pay for vision, dental or medical care, as well as prescription or over-the-counter drugs. It is not available to those who are receiving Medicare, claimed as a dependent, or receiving health coverage outside of their high-deductible health plan.

What Are the Benefits of an HSA?

• Individual HSA contributions are tax-deductible. Furthermore, payroll deductions that contribute to an HSA are excluded from the employee’s taxable income. (Excess contributions may be taxed, however.)

• HSA distributions are tax-free. This is provided that the distributions go toward qualified expenses, and the high-deductible health plan deductible has not yet been reached.