… Another Valuable Retirement Savings Plan Tool
Are you eligible to open a health savings account (“HSA”)? If yes, and you have not already opened one, you should consider doing so as this type of account is another tax-advantaged way to save for any medical expenses you will likely have in retirement.
An HSA is a tax exempt account that can be used to pay for medical expenses you or your family may incur. There are three key tax benefits to having an HSA. First, the money going into an HSA is pre-tax (if coming directly from your employer) or tax-deductible (if coming directly from you). Second, any interest, dividends, or other earnings inside your HSA are tax free. Third, any distributions from your HSA that are used to pay qualified medical expenses are also tax free. Additionally, the balance in an HSA can be carried over year-to-year, thus you are able to benefit from tax-free compound growth over time. Finally, if you name your spouse as the beneficiary of your HSA then, upon your death, it becomes their HSA and retains its tax-free status.
Your employer may already offer you the option to open an HSA, but, if not, you may open one with a bank, an insurance company, or any other qualified HSA trustee. In order to be eligible to open an HSA, however, you must satisfy certain criteria including:
° You must already be covered under a high deductible health insurance plan.
° You must not have any other health coverage (note there are some limited exceptions to this requirement).
° You must not be enrolled in Medicare.
° You must not be claimed as a dependent on someone else’s tax return.
In addition to serving as a way to cover medical expenses before you reach the deductible limit on your high deductible health insurance plan, an HSA offers you a tax-free way to save and grow your money. Ideally, you will be able to cover your family’s medical expenses each year by paying out-of-pocket up to the point where you reach your deductible. However, in a year where money may be tight or you incur extra medical expenses you will know you have financial resources available in your HSA to help pay your medical expenses. Also, since you are not required to take money from your HSA in the same year you actually incurred and paid for a medical expense, you can build up money in your HSA over time, save your medical bills that you paid along the way, and then use some of your HSA to pay college tuition or some other expense. As long as the amount you take from your HSA corresponds to medical bills you incurred and paid, there is no requirement that you take your reimbursement at the same time you paid the medical bills.
While an HSA can be a useful and tax-friendly way to save, it also has some notable drawbacks. For example, the money in your HSA is to be used for qualified health expenses. Thus, if you take money from your HSA and have not already incurred qualified medical expenses then you will be subject to income taxes. Also, if you are not over age 65 or otherwise eligible for Medicare you will be subject to a 20% penalty. Another shortcoming of an HSA is that you are limited in how much you can contribute each year — currently $3,350 for individual coverage and $6,750 for family coverage with an extra $1,000 catch-up contribution allowed if you are over age 55. Furthermore, you may no longer contribute to your HSA once you are enrolled in Medicare (which for most people is at age 65).
If you are relatively young now and eligible to have an HSA, it most likely makes sense to open one and begin funding it as you will have plenty of time on your side to hopefully accumulate a significant amount of money in a tax-sheltered account. However, even if you are older or are not able to contribute the maximum amount to an HSA each year, it probably makes sense to still open an account. At a minimum, you will have some financial reserves to fall back upon at a time when you incur extra medical expenses and you will also benefit from the tax-sheltered nature of this type of account. If you are interested in learning more about an HSA and you satisfy the basic criteria listed above, you should check with your employer to see if they already offer an HSA option. If not, you should check with your bank or insurance company to see if they offer HSAs. Your financial advisor here at BLB&B Advisors is also available to talk with you about HSAs.