At this point, just about everyone seems to be enrolled in a high deductible Health Savings Account (HSA) compatible health plan. The escalating costs of healthcare are astounding. I was depressed for days after realizing a few years ago that my monthly health insurance premium exceeded my mortgage payment. Adding insult to injury, our higher premiums come with higher than ever deductible and coinsurance amounts. However, there are ways to maximize the potential deductions and other benefits that exist with HSAs.
The Ins and Outs of HSAs
HSAs were created by Congress in 2003 to replace the MSA (Medical Savings Account) that had been underutilized since their creation by HIPAA legislation in 1996.
Like an Individual Retirement Accounts (IRA), an HSA is funded annually on a tax-advantaged basis. The maximum contribution for a family in 2017 is $6,750 ($3,400 for an individual). You can fund an HSA yourself and take the tax deduction on your tax return, or your employer may deduct the contribution before taxes from your paycheck. Unlike an IRA, you are allowed to use the funds in your HSA at any time with no age restriction, as long it’s for medical-related expenses. Also in contrast to an IRA, your HSA funds are never taxed at all for medical costs (IRA funds are tax-deferred, meaning you pay ordinary income tax on what you withdraw).
In order to be eligible to contribute to an HSA account, you must be enrolled in an HSA compatible high deductible health plan (HDHP). The minimum deductible and maximum out of pocket must comply with IRS limits, adjusted as often as annually for inflation. Your plan will clearly specify if it meets HSA compatible HDHP criteria.
Taking Advantage of the HSA Deduction
Many people do not take advantage of the HSA deduction, and of those who do, most do not maximize its impact to the fullest extent. Funding an HSA is a no-brainer because you are getting a tax deduction on money you know you’ll use for health-related expenses at some point. Once funded, it’s tempting to use your HSA for regular medical expenses, like dental checkups and annual exams. I recommend you resist the temptation to spend your HSA dollars. Instead, save your HSA as if it’s a retirement account and use it later in life, when most of us will incur our heaviest health expenses.
Not convinced? Here are some other reasons to accumulate your HSA for retirement:
- You can invest your HSA just like an IRA, in a nice portfolio to provide long term investment returns. The return on your contributions is tax free, just like your principal, as long as you use it for medical-related expenses.
- In contrast to IRA rules, you are not required to take Required Minimum Distributions (RMDs) from your HSA at 70½.
- Medicare premiums are considered a qualified expense for your HSA, along with most long term care expenses. For a full list of qualified expenses, see https://www.irs.gov/pub/irs-pdf/p502.pdf.
- Upon death, your spouse can assume your HSA as his or her own as long as they are the named beneficiary.
One disadvantage to waiting on HSA distributions is that the account becomes taxable if it’s inherited by a non-spouse. Therefore; your HSA is a terrible legacy planning tool, in contrast to the excellent inheritable traits of a ROTH-IRA.
I hope you can see the benefits of not only contributing to an HSA account, but investing the funds for later use down the road. If you have questions, or are considering an advanced analysis of your different accounts and how they should be utilized to their maximum potential, please contact us.