Health Savings Accounts – a tax-friendly safeguard and retirement savings strategy
Updated: Jan 17, 2020
Every year, we are faced with a number of healthcare options—whether it stems from a job change, getting married, open enrollment or retiring.
As healthcare costs have risen greatly over the years, one of the coverage options being offered more and more is the high-deductible health plan (HDHP), defined by the IRS as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. HDHPs boast the benefit of lower premiums than a traditional plan but having higher deductible and out-of-pocket maximum limits means you are taking more of a risk if your healthcare costs are greater than anticipated. To help mitigate that risk, more employers and institutions are offering health savings accounts (HSAs) to complement HDHPs.
A health savings account (HSA) is a tax-advantaged savings account available to taxpayers enrolled in a HDHP, that lets you set money aside on a pre-tax basis to help cover the costs of any qualified medical expenses such as deductibles, co-pays, coinsurance or any other qualified expenses not covered by your health plan. If you are enrolled in a HDHP or considering one, here are a few reasons why you should consider opening an HSA.
They Offer a Triple Tax Advantage
An HSA offers three separate tax benefits:
Contributions to an HSA are made with pre-tax dollars, similar to a 401(k) or IRA. Pre-tax contributions will reduce your income tax burden for year.
Money held can typically be invested with the opportunity to grow tax-free, at least at the federal level.
Withdrawals from HSAs are also federal tax-free (state tax laws vary) when used for qualified medical expenses.
Essentially, HSAs allow you to pay for your medical care with money that has never been taxed.
Use it as a Retirement Account
For investors, opening an HSA is a valuable opportunity to gather funds in another “retirement account”. Unlike the often-mistaken flexible spending account (FSA), HSA contributions are not “use it or lose it” and can be carried forward for future spending needs. If your cash flow allows, ideally it would be beneficial to build up a balance and pay current medical expenses from other sources, allowing you to invest over time, similar to an IRA. For many, healthcare is among the largest expenses in retirement, and HSAs offer another way to pay for these future medical expenses. However, the funds are available for immediate use in case unanticipated healthcare expenses are to occur. Another benefit is that depending on the HSA, you may have access to an assortment of funds allowing you to employ a diversified investment strategy that works with your longer-term goals.
What if you need to use the balance for other retirement needs? No problem. You can make withdrawals for non-medical purposes once you are 65 years and older, without needing to pay a penalty, however you will still need to pay taxes on the withdrawal amount, similar to the tax ramifications of withdrawing from a 401(k).
No Deduction Limit for High-Income Earners
Depending on how much you earn, you may be affected by phaseouts that limit the deductibility of your retirement contribution. HSAs do not have the same restriction. Regardless of income, you can make a pre-tax deductible contribution up to the 2019 limit--$3,500 for individuals and $7,000 for families. If you are 55 or older anytime in 2019, you can contribute an extra $1,000.
Are You Eligible?
Individuals must meet all of the following criteria in order to be eligible to contribute:
You are enrolled in a high deductible health plan (HDHP).
You are not covered by another healthcare plan, such as a health plan sponsored by a spouse’s employer, Medicare, or TriCare.
You cannot be claimed as a dependent on another individual’s tax return.
HSAs are not always offered by your employer, and many custodians such as Fidelity are now offering HSA brokerage accounts that can give you the opportunity to participate. If you are interested in learning more, please contact us for information. If you are already enrolled in an HSA, we are also happy to review your investment options as part of your overall investment strategy.