Do you have a Health Savings Account (HSA)?
Many employers now offer high-deductible insurance plans that qualify participants to save money in a health savings account. These plans have lower premiums than other health insurance policies but higher out-of-pocket costs.
There are some very good financial planning reasons to consider using one of these plans. But first, consider this:
Does your plan qualify?
Do you have the ability to save?
Do you have enough in an HSA to cover the potential deductibles and co-pays?
7 Reasons to Consider a Health Savings Account
# 1. Tax-Deductible Contributions
HSA contributions are tax-deductible, regardless of your income or whether you participate in a retirement plan. For 2020, an individual can contribute $3,550 and a family can contribute $7,100. Participants over age 50 can contribute an additional $1000. That can equate to significant tax savings if you are in a higher tax bracket.
#2. Tax -Free Qualified Healthcare Distributions
When you pay for healthcare from an HSA, the distributions are tax -free. The list of qualified healthcare expenses covers everything from acupuncture to prescriptions and weight-loss programs. Since you deducted the funds you deposited to your HSA from your taxable income, the effect is the same as being able to deduct your healthcare costs from your taxes without all the complexity. Before retirement, most health insurance premiums are excluded. However, long-term care insurance premiums are considered a qualified expense.
#3. Balances Grow Tax-Free
Unlike Flexible Spending Accounts, you do not have to use your Health Savings Account balances up each year. You can accumulate balances. And, unlike savings or regular investment accounts, you do not pay taxes on any growth you receive on your account balance. This allows everything you earn in the account to remain for future expenses.
#4. Delay Qualified Distributions
Most HSA participants take distributions from their accounts to cover expenses as they are incurred. However, you can delay taking distributions indefinitely. If you can cover medical expenses from your regular savings, you can leave your HSA funds to grow tax–free for retirement. By saving your expense records, you can then take funds from the HSA in later years and they will still be treated as qualified, tax–free distributions.
#5. Invest the Balance
Most major investment custodians now offer HSA investment accounts. If you accumulate balances above what you need to cover current expenses, you can move funds into an investment account and invest those funds for the long-term just as you would a retirement account. We recommend keeping one or two years of potential spending needs in a cash HSA and then investing balances beyond that level.
#6. Non-Healthcare Distributions are treated like IRA distributions After Age 65
In retirement, qualified healthcare expenses are still tax-free. Most retirees have no trouble coming up with medical expenses on which to spend their HSA balances. However, the worst-case scenario after age 65 is that distributions from an HSA that aren’t used to cover health care costs are treated just like distributions from other pre-tax retirement accounts, such as IRAs and 401ks, and taxed as income.
#7. Medicare Part A and B Premiums can be a Qualified Expense During Retirement
Health Savings Account balances can also be used to pay for Medicare Part A and Part B premiums. Medicare supplements are generally not considered a qualifying expense, and most retirees don’t pay a premium for Medicare Part A. However, Medicare Part B requires a premium that is usually deducted directly from Social Security payments. Having those payments come from an HSA instead reduces taxable income in retirement and can add up to significant savings.
Still have questions?
Our financial advisors at Shotwell Rutter Baer are happy to discuss your current and future health savings goals and can help you determine where your money will best work for you so you can optimize your HSA.
Contact us today by calling 517-321-4832 or email firstname.lastname@example.org. We look forward to hearing from you.
About Shotwell Rutter Baer
Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.
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