Why do financial professionals love Heath Savings Accounts (HSA)? Consider the following attributes: a pool of tax-exempt dollars for health care, a path to tax savings, even a possible source of retirement income after age 65. It sounds really good, doesn’t it?
About 26 million Americans now have HSAs.
In order to qualify to have one, you must enroll in a high-deductible health plan (HDHP). In 2018, your deductible must be $1,350 or higher for individuals or $2,650 or higher for a family. In exchange for accepting the high deductible, you may pay lower premiums for the coverage.1,2
HSAs are funded with tax-free contributions, either from payroll deductions or from a bank account. This year, an individual can direct as much as $3,450 into an HSA, while a family can contribute up to $6,900. (These contribution caps are $1,000 higher if you are 55 or older in 2018.) Some employers will even provide a matching contribution on your behalf.1,2
HSAs offer three potential opportunities for tax savings.
Your account contributions are tax free (that is, tax deductible), the earnings in your account grow tax free, and you can withdraw funds from your HSA, tax free, so long as they are used to pay for qualified health care expenses, such as deductibles, co-payments, and hospitalization costs. (HSA funds may not be used to pay health insurance premiums.)1,3
At age 65, you can turn to your HSA for retirement income. Current federal tax law allows HSA owners aged 65 and older to withdraw HSA funds for any purpose, penalty free. You can use the HSA funds to pay Medicare premiums (other than premiums for a Medicare supplemental policy, such as Medigap) or extended-care insurance premiums. No Required Minimum Distributions (RMDs) are ever required of HSA owners. Keep in mind, however, if you take a distribution that is not used for a qualified medical expense, the money may be taxable.3
Why is an HSA less attractive for some people?
The biggest hurdle may be the requirement of a higher deductible health plan. When you enroll in one of these plans, you agree to pay all (or nearly all) of the cost of medicines, hospital stays, and doctor visits out of your pocket until the high insurance deductible is reached.1 The other hurdle is making contributions to the HSA. For some, just meeting the monthly premiums of health insurance can be a challenge, especially if the household contends with other significant financial pressures.
Each year, when you’re given the opportunity to reconsider your health care coverage, we encourage you to evaluate the pros and cons of a plan that allows you to utilize a Health Savings Account. If you’d like help with your decision, we’d love to be of service.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.
“Wisdom Wealth Strategies, LLC is a registered investment advisor offering advisory services in the states of Colorado and California, and in other jurisdictions where exempted.” This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates.
1 – tinyurl.com/y9lbk7s7 [2/2/17]
2 – trustetc.com/resources/investor-awareness/contribution-limits [1/3/18]
3 – thebalance.com/hsa-vs-ira-you-might-be-surprised-2388481 [8/13/17]