At AFA, we hear our clients express concerns about two financial challenges more often than any others:
• Will I be ready to retire with the lifestyle I want?
• What can I do to protect myself from rising health care costs now and in the future?
Did you realize there is a single vehicle that can help you make progress in both areas? It’s called a health savings account (HSA), which is a government-regulated savings account that combines many of the tax benefits of a Flexible Spending Account and a 401(k), including:
• Your contributions to the plan are pre-tax (if offered through your employer) or tax-deductible (if established on your own). If funded through your employer’s plan, you also don’t pay FICA on the contributions, putting an extra 7.65% back in your pocket.
• Withdrawals for qualified medical expenses are tax-free (more about that below).
• The balance in your plan (that you don’t spend for medical expenses) grows tax-deferred and can be rolled over from year to year, supplementing other retirement savings.
Who Can Qualify?
Many larger employers offer HSA’s to the employees, but even if your employer doesn’t offer this benefit, you may still be able to establish and fund one yourself. Who can qualify for an HSA?
HSAs are available only to people who have a qualifying, high-deductible health plan (HDHP), which for 2019 means the insurance plan must have a deductible of at least $1,350 for individuals and $2,700 for families. In addition, maximum out-of-pocket costs (including deductibles and co-pays) are $6,750 for individuals and $13,500 for families.
Even if you are covered by an HDHP, you still need to make sure you’re not covered by any disqualifying plans or programs. These include:
• Another health plan that isn’t HSA-qualified, including a spouse’s health plan or a supplemental health plan.
• Medicare, Medicaid, or Tricare. However, you can still be HSA-eligible if your spouse is enrolled in one of those plans.
• A Flexible Spending Account (FSA) for either you or your spouse.
• Veteran’s healthcare benefits (either being received currently or in the past 90 days for any non-service-connected disability).
• Currently being claimed as a dependent on another person’s tax return.
If none of these conditions apply to you, and you’ve verified that your health plan is HSA-qualified, then you’re eligible for an HSA.
How Much Can You Contribute?
The IRS sets limits on the maximum amount that can be contributed to an HSA each year. For 2019, the contribution limits are $3500 for an individual and $7000 for a family (or $4500 and $8000 if you are 55 or older). It’s important to remember that ALL contributions made by you or your employer to ANY HSA’s established on your own or through your employer will count towards these limits.
What Can You Use HSA funds for?
The most powerful way to use your HSA is to use it to pay for qualified medical expenses for you, your spouse, or tax dependents, since all such withdrawals are completely tax-free, (even if your family members are on different health plans or ineligible for HSA’s). Generally, an eligible expense is anything prescribed by a doctor for a medical condition that returns you to a normal state of health (like doctor bills, prescriptions, eyeglasses, or fillings). Certain insurance premiums are also eligible, like qualified long-term care premiums and COBRA. And although you’re not eligible for an HSA if you’re enrolled in Medicare, you can use existing HSA funds to pay for parts of you or your spouse’s Medicare premiums. For a comprehensive list, see IRS Publication 502 and IRS Publication 969.
You can even use your HSA to pay for non-eligible expenses at any time, for any reason. However, withdrawals for ineligible expenses carry a big tax burden, since they are taxed at ordinary income tax rates plus a 20% penalty. However, once you reach age 65, the 20% tax penalty disappears. At that point, your HSA works like a 401k or pre-tax IRA.
As you can see, the most powerful benefits from an HSA come from funding one early and often to allow time for the funds to grow tax-deferred. However, if you are nearing retirement, it’s still not too late to consider an HSA. If you find that you and your family are currently “light” users of health care, the high-deductible plan might result in significant savings on your health insurance coverage while working, since a HDHP generally has much lower premiums than a lower deductible plan. In addition, if the bulk of the contributions to your HSA are not generally needed each year, the balance can grow and accumulate, giving you a tax-free pot of money to pay health care costs in retirement.
If you are wondering if an HSA could be a helpful addition to your financial plan, we welcome the opportunity to discuss it with you in the context of your Retire-ReadyFIT™.