By K. Bridget Schneider, CFP®, CRPC®
Are you contributing to a Health Savings Account (HSA) and aware of the benefits they offer? There is a lot of confusion about how these accounts work and that may keep some of you from even establishing an HSA. Even those who have one may not be taking full advantage of it.
Health Savings Accounts
Many Americans contribute to a Health Savings Account through their employer to complement the high deductible health insurance plan offered to employees. In my experience, most only contribute an amount they feel will be needed for medical expenses during that year. The result is that the HSA is funded but most, if not all, is withdrawn in that same year.
Health Savings Accounts – Triple Tax Advantage
If I told you that these Health Savings Accounts can be triple tax-advantaged, would you be interested in learning more? It’s true! Not only are your contributions tax deductible, but earnings grow tax-deferred, and if withdrawals are for a qualified medical expense, they are tax-free*. Qualified medical expenses can include Medicare premiums, drug and doctor co-pays, and even some long-term care insurance premiums.
*Withdrawals from a healthcare savings account (HSA) for non-qualified expenses are subject to income taxes, and if made prior to age 65, a 20% penalty may apply.
This can be truly helpful as we age since we usually have a need for more medical care. In addition, we don’t know what those medical costs or Medicare will look like in the future. Neither a Traditional IRA nor a Roth IRA offer both tax deductibility and the potential for tax-free withdrawals in one account!
Health Savings Accounts – Contributions
For 2018 the maximum HSA contribution is $3,450 for a single person and $6,900 for a family. Those age 55 or older are eligible to make a catch-up contribution of $1,000 to the HSA. You should confirm that your health insurance plan can be paired with a Health Savings Account and that you qualify to fund one. For further help determining this consult IRS Publication 969.
Remember, taking full advantage of this unique opportunity requires that you maximize your contributions each year, invest those funds, and try to avoid tapping the balance for current medical expenses. Then a Health Savings Account becomes a valuable part of your retirement savings plan.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. Tax laws and provisions are subject to change. We suggest that you discuss your specific tax issues with a qualified tax advisor.