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Creative uses for your tax-advantaged accounts
NEW YORK (8/26/14)--Just as with finding unconventional uses for common items--did you know crushed aspirin is great at removing sweat stains?--there are multiple ways to use your tax-advantaged accounts. 
 
A report released this month from the Employee Benefit Research Institute, Washington D.C., found that the average person contributing the maximum allowed to a health savings account (HSA) could save up $360,000 in 40 years assuming a 2.5% rate of return. That amount jumps to $600,000 after 40 years at a 5% rate of return (The New York Times Aug. 19).
 
HSAs were created a decade ago to help people with high-deductible insurance plans pay for health-care expenses. The reason financial planners are beginning to recommend them as a potential vehicle for retirement savings is that they're triple tax-advantaged: contributions reduce your taxable income, grow tax free, and can be withdrawn tax-free for eligible expenses. 
 
And although the max you can contribute annually to an HSA now is $3,300 for an individual and $6,550 for a family, the balance can be rolled over from year to year and invested. 
 
You can only contribute to an HSA if you're enrolled in a high-deductible health insurance plan, and it only makes sense to use it as a long-term investment if you have enough money to cover your out-of-pocket healthcare expenses.
 
Here are some other outside-the-box uses for conventional tax-advantaged accounts (Forbes Aug. 14):
  • Make your Roth IRA an emergency fund. Ideally, you'd have an emergency fund equal to three to six months of expenses. What could help get you there more quickly is using your Roth IRA (individual retirement account) as an emergency fund. You can withdraw any money except earned interest, tax-free, from a Roth IRA at any time.
     
  • Tap your 401(k) for a down payment on a house or for education expenses. You can withdraw up to $10,000 from your retirement account without paying the 10% penalty if it's used to buy a new home--to qualify you cannot have owned a home in the last 3 years--or for education expenses. Both a degree and paid-off home can be huge assets later in life, but make sure you're still on track for retirement without that money.
     
  • Use your Roth IRA for health insurance in retirement. If you retire before you're eligible for Medicare at 65, you may be eligible for subsidies that significantly lower the cost of buying a plan through a healthcare exchange. Because Roth IRA withdrawals are tax-free, you can use that money to pay for the health plan without affecting your eligibility for subsidies.
For related information, read "Interest Deferred: Beware Zero-Percent Medical Credit Cards" and "Self-Directed IRAs: With Flexibility Comes Risk" in the Home & Family Finance Resource Center.
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