Before I get into this post, I want to address what you all are obviously thinking – this blog post is going to be incredible. You’re absolutely right, it is. People go to bed at night and dream about the possibility of tax-advantaged accounts and many of you didn’t even know you had access to this particular one. For those of you that knew they existed, but thought it was too boring to learn about – well, you’re wrong. For those of you that knew they existed and thought they were only to fund healthcare expenses, wrong again. For those of you that have one and are funding it, proceed to the next post, you’re already in the club.
First, what is an HSA? HSA stands for Health Savings Account and is an account type that was designed to help people deal with out of pocket health care costs. They’re only available to those of us who have a High Deductible Health Plan (HDHP), which, in 2019, is defined as a plan with an annual deductible of at least $1350 for singles and $2700 for those with family plans (there are also limits on the out of pocket maximums of $6750 and $13,500 for single and family, respectively). It matters not whether you have an employer sponsored plan or buy health insurance on your own, the HDHP part is what counts.
What you can contribute to these also depends on whether you have a single or family plan. Age is another factor. If you have a single plan and under are 55, you can put up to $3500 in an HSA, $7000 for a family. Regardless of single or family, you’re eligible to put another $1000 in if you’re over 55 (note this is marginally different than the age 50 catch up contributions for IRAs/Roth IRAs).
All this info seems fine, so what makes HSAs unique? Glad you asked. HSAs offer three opportunities for tax advantages. When you fund an HSA directly, you get a tax-deduction. While the money is in the account, it can grow tax-deferred. If you withdraw that money for qualified medical expenses, regardless of your age, you pay no tax on the distribution. If you’re following along playing tax-free BINGO at home, there’s a triple tax-advantage.*
What if I take the money out for something other than a qualified medical expense, you say? Well, if you’re under 65, I’ll shake my fist at you, but that will be less painful than the state and federal income tax that you’ll pay, on top of a 20% penalty unless an exception applies. If you’re 65, however, things get better – you’ll pay state and federal taxes, but no penalty. In this way, it works similarly (from a tax perspective) to how a traditional IRA of 401(k) would work, but with the added benefit of still allowing tax-free distributions for qualified medical expenses. Also, there are no income limits on contributions. Pretty good, right? And that’s not all, you also don’t subject yourself to required minimum distributions (RMDs) at age 70.5.
If you’ve gotten this far and are still curious (God Bless you) about what constitutes a qualified medical expense, dpath.com has a decent list. Not to spoil the surprise, but among the eligible expenses are things like Medicare Part B and D premiums and lead-based paint removal. Things that they list as ineligible – dancing lessons. Sad Face.
So how might you incorporate this into your own financial plan? Well the answers are myriad, but obviously it depends on your situation. If you have a HDHP or have access to one, decide whether the additional out of pocket costs make sense in your health situation. If you had a HDHP and have extra money that you’d like to save, having already maxed out other retirement savings vehicles, an HSA seems a logical possibility. If you think an HSA seems enticing, but you aren’t maxing out (making the highest contribution allowed by law) your other retirement vehicles, weigh the pros and cons of an HSA versus what you’re currently contributing to. If you’re beyond the maximum employee contribution that it takes to get a full employer match in your 401(K), you could put the excess in an HSA, get essentially the same tax outcome now, and give yourself more flexibility in the future. If you know you won’t retire until 65 and can’t fund both an IRA and HSA, an HSA offers many of the benefits of IRAs, with a couple of added bonuses and a drawback or two (for example, when you can withdrawal without penalty). Like all financial decisions, it’s specific to your situation and it probably makes sense to talk to your financial advisor to see what best suits you.
In the end, it’s another arrow in your financial quiver, one that’s pretty stacked if you’ve been following our blog and Facebook page for a while. If you haven’t been, you’re probably not living your best life. We’ll be here if you need us.
* Depending upon the state, HSA contributions and earnings could be subject to state taxes.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. Investing involves risk, including the potential for loss of principal. 04/19