If you have a high-deductible health plan, or HDHP, are not enrolled in Medicare and are not someone’s dependent, you’re eligible for an HSA. Such an account has many benefits as a means to save for retirement.
In order for your health care to qualify as an HDHP you’ll need to be enrolled in a plan where you have to meet a high deductible of out-of-pocket expenses before insurance will cover medical-related costs.
“According to the IRS, those are plans with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, copayments and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage,” reported chief investment officer of Better Money Decisions Kate Stalter in a May 2016 article for U.S. News.
If you are financially able to enroll in an HDHP, there are benefits you can take advantage of in opening an HSA that you should consider.
Triple tax breaks – Unlike other savings vehicles, such as 401(k)s, IRAs and other interest-building accounts, HSAs have several advantages when it comes to taxable investments.
“Its first advantage is that contributions are tax-deductible, or if made through a payroll deduction, they are pretax. Second, the interest earned is tax-free. Third, account owners may make tax-free withdrawals for qualified medical expenses. Qualified expenses include most services provided by licensed health providers, as well as diagnostic devices and prescriptions,” explained Stalter.
The triple tax break afforded to HSA accounts makes them very desirable as a savings vehicle. Even traditional IRAs and 401(k)s have a tax on withdrawals, and funds within Roth IRAs are taxed upon contribution.
“There’s no other vehicle under the tax code that has the kind of preferential treatment that Health Savings Accounts have. But it’s a way for those who are not focused on tax shelter opportunities to put the money aside as well,” says senior vice president of Advisor Services at Manning & Napier Shelby George.
Ease of use – HSAs are traditionally meant to help individuals save money for future health care costs. As long as you’re 65 or older, you can withdraw funds from the account penalty free.
You can even use these funds for nonmedical expenses, but with a 20 percent income tax fee. Regardless of what the money is used for, it’s easy to access your funds.
“You can receive blank checks, a debit card or both [to easily take money out of the account]. The debit card may be used for online purchases,” explained Forbes contributor Sharon Waldrop in an August 2013 article.
Long-term savings – An HSA also has benefits that, when taken advantage of, can provide long-term savings as another route for retirement planning.
“With a Health Savings Account, the money stays with you even if you don’t spend all of it during the year. There is no pressure to ‘use it or lose it’ [as in a Flexible Spending Account], which encourages people to be wasteful and get [health care services] they may not need,” reports Director of Taxation at Maier Markey & Justic LLP Bernadette Schopfer.
Furthermore, Co-Owner and Principal of Alpha Financial Advisors Ann Reilly Gugle suggests allowing your HSA to grow tax-free and investing your money for long-term appreciation, rather than spending it on health care needs as they occur.
“In this sense, the HSA resembles a Roth IRA, in that it grows tax free, but you also get the benefit of a current deduction” that Roth IRAs do not, she says.
Especially if you’re already maxing out your 401(k) and IRA plans, you should consider investing in an HSA to build as much capital as you can for retirement.
—This was an excerpt from an article on the Extra Credit Union website Sept 2016