Before continuing the health savings account (HSA) topic from two weeks ago, I’d like to correct a typographical error that appeared in Part I. The reference to the $1,000 catch-up provision for those over age 55 was misstated as existing for those over age 65.

HSAs offer a way to get special tax treatment towards saving money for medical expenses that are not covered by insurance. It’s important to optimize your HSA to make the most of your tax savings.

Eligible expenses

What constitutes an eligible expense is determined by the IRS. There is a wide range of IRS-qualified expenses, many of which aren’t usually covered by health insurance plans. Some of these are deductibles, co-insurance, prescriptions and dental and vision care. Most things that would typically qualify for the medical expense deduction on your tax return qualify for an HSA.

Health insurance premiums are generally not considered IRS-qualified expenses unless they are for qualified long-term care insurance, COBRA health care continuation coverage or health care coverage while an individual is receiving unemployment compensation. For people over 65, qualified expenses include premiums for Medicare parts A, B, D and Medicare HMA, the portion an employee pays for employer-sponsored health insurance and the employee portion of employer-sponsored retiree health insurance. Supplemental policies like Medigap are not considered qualified by the IRS.

Qualified expenses can be paid directly from the Health Savings Account by check or debit card. Reimbursements are also allowed for previously paid medical expenses, as long as the expense was incurred after the establishment of the HSA. There is no statute of limitations for reimbursements as long as the HSA was in existence at the time of the expense.

HSAs Are Not Use it or Lose it

Many people confuse HSAs with FSAs or Flexible Savings Accounts. With an FSA, any unused funds in excess of $500 are forfeited at the end of the year. HSAs are different, though. Account balances simply roll over from year to year, allowing for incredible growth and accumulation of savings. As long as you are eligible, you can continue to contribute to your account tax-free and let the money grow tax-free for use at any time in the future, whether near or distant.

HSAs and the Affordable Care Act

It was predicted that with the passage of the Patient Protection and Affordable Care Act (ACA) or Obamacare, HSAs would become obsolete. However, that has not been the case and high deductible health plans are still widely available. In fact, about 25 percent of the plans available on the ACA exchanges are HSA-eligible.

Using it for Retirement Savings

The obvious and typical use of an HSA is to pay for medical expenses as they occur. Many people, however, have turned their account from a current pay-as-you-go way of avoiding taxes on medical expenses to a lucrative retirement savings vehicle. They pay for current medical expenses out of pocket, but maximize their HSA contributions and just let them grow for use during retirement.

It is no surprise that healthcare is often a major expense in retirement, especially the older you get. In fact, it has been found that typical retiree medical expenses are often as much as $500/month per person. In their annual Health Care Cost Estimate study, Fidelity estimates that a 65-year-old couple will need $245,000 to cover healthcare expenses in retirement.

Since medical costs are such a huge part of retirement financial needs, it makes sense that an HSA can be used for retirement savings. Your HSA should not be your only retirement savings, since funds are only tax-free for qualified medical expenses. Nevertheless, when used in conjunction with IRAs and 401(k)s to pay for non-medical expenses, they can be a very powerful way to build your nest egg. After all, an HSA receives better tax treatment than any IRA or 401(k), whether traditional or Roth.

There is one caveat, though. In order to use an HSA for retirement savings, you need to make sure it is invested properly for long term growth. Keeping HSA money in a traditional savings account earning .5 percent interest may be a good idea for those who are using the money for current expenses, but to do that for retirement savings would be to miss out on years and years of tax-free growth.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.