Healthcare Savings Accounts: Financial Planning’s Best Kept Secret

Healthcare Savings Accounts (HSA) are often misunderstood and very much underutilized.  Recently, a friend of mine asked my advice on contributing to his HSA.  Should it be done through work or not, since it is just a “crappy” savings account?  My answer was a resounding and unquestionable YES!  I told him  the HSAs are one of the best things  going right now.  They have some incredible advantages you can’t access anywhere else. So how do they work? And, what the heck makes them so great?

The Basics:

At their core, HSAs are coupled with high deductible health plans to enable a participant to save money on a tax deferred basis.  Additionally, withdrawals upon using the funds are tax free.  Your dollars go into a savings account, where they grow and wait to be used on qualified medical expenses.  (Check here for IRS guidelines IRS Qualified Expenses.)  Many plans, like mine at work, offer an investment option as well for your funds, rather than a low interest savings account.

For 2017, the contribution limit for a single person is $3,400; for a family that limit is $6,750.  There is an additional $1,000 catch-up contribution, once you attain age 55.  It is important to note these are all an aggregate figure.  Therefore, if you company contributes anything on your behalf, you would simply deduct it from the total to have your adjusted personal contribution limit.

Also, remember unlike a F.S.A account the HSA doesn’t fall under the “use it or lose it” guidelines, so there is no pressure to spend your full contributions each year.  It actually can be a very useful retirement planning technique.

Eligibility:

To qualify for a HSA account and contributions you must meet the following criteria:

1. You have to be covered under a high deductible health insurance plan.
2. You have to be covered by an IRS permitted health insurance plan.
3. You cannot be currently enrolled in Medicare.
4. You may not be claimed as a dependent on someone else’s tax return.

Unlike a traditional IRA, there are no income limits when it comes to contributing or receiving a deduction on your HSA plan.

As you age:

HSA accounts become more valuable as you age and not just because your medical expenses increase.  For starters, you can save your dollars for years in these plans.  The balances will grow and can help offset costly retirement medical expenses.  An added benefit is there is no required minimum distribution on HSA dollars  (unlike a 401(k) or an IRA).  This means these dollars can continue to grow tax free for eternity and be used to pay for Medicare coverage, which is one of the bigger retirement expenses most people incur.  Lastly if you so choose to do so, you can get a one-time transfer of your HSA into an IRA account.  Just make sure to monitor the rules around this option as to not cause a taxable event.

How I use mine – an example:

My company offers a HSA account and I thought it would be helpful to explain exactly how I use mine.  We are currently a family of 4 and I choose to contribute the IRS maximum each year.  Since our deductible is $3,700, I will leave roughly $4,000 in the savings account portion.  I’ll then take the other roughly $2,750 and transfer it to the investment portion, where I let those dollars grow with the markets.  I’ll likely leave that until when I am retired.  As qualified medical expenses come up, I make sure to use the cash portion to pay those expenses with tax-free dollars,  while making sure I keep a track of the expenses for IRS purposes.  To me, this is the best way for my family to benefit from the tax benefits, while taking a step towards protecting future retirement liabilities.

Final thoughts:

Like anything else in financial planning, every situation is unique and requires specific advice tailored to one’s unique needs.  That said, I find the HSA a very useful and powerful financial planning tool for a majority of clients (and myself personally).  It’s essentially a Traditional IRA and a Roth IRA wrapped into one great little package.

Hope you found this blog post both informative and enjoyable.  As always, feel free to sign-up for future blogs.

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