Strategies For Your Health Savings Account (HSA)Submitted by Castlebar Asset Management on October 15th, 2015
A dollar today or two down the road. That is how you should approach using your Health Savings Account (HSA). Those individuals and families who have high deductible insurance plans can participate in HSAs and contribute on a pretax basis. HSAs can be held in cash or invested in stocks, bonds and mutual funds.
HSAs have been around since 2003. You qualify to contribute to a HSA if you are covered by a high deductible health plan, not enrolled in Medicare and are not claimed as a dependent on a tax return. A high deductible plan in 2015 has a deductive of $1,300 for a single person or $2,600 for a family. You are able to contribute up to $3,350 for a single person and $6,650 for a family. Like retirement accounts there are also catch up contributions. Individuals over 55 years old can make an additional $1,000. There are no income limits for HSAs if you meet the other criteria. Your contributions to this account are tax deductible.
Money in your HSA account can be used to pay for qualified medical expenses. These are defined by the IRS as medical care, prescription drugs and payment of long term care. A longer list is available here. You can withdraw money for non-medical expenses but it will be subject to a 20% tax penalty. A great feature of HSAs are you don’t have to use all of the money held in your account each year. You can choose to save this for medical expenses in future years or save it for retirement.
HSA’s get interesting when you start to use it as a long term retirement vehicle. If you are able to pay your medical expenses out of pocket and not take a distribution from your account it can start to compound over time. A couple who is age 35 and is able to contribute the max to their HSAs and earn a 5% rate of return will have over $480,000 saved by the time they are 65. Not too shabby.
In retirement you can use your HSA to pay your Medicare premiums and long term care expenses. Withdrawals for these qualified expenses are tax free unlike distributions from your IRA or payments from social security. Using your HSA this way has a triple tax benefit. Your initial contribution is tax deductible, your account can grow tax-deferred and you can withdraw from your account tax free. You can also withdraw money from your HSA after 65 to pay anything you would like but it will be taxed as income, just like an IRA distribution.
So should you tap your HSA now or use it in retirement? It comes down to if you can fund your health care expenses within your current budget. Letting money grow in a HSA is silly if you are going into debt to pay your current medical bills. If you are able to cover health care costs there are clear advantages to use an HSA as a bonus retirement account. High income couples may find this as a way to boost their retirement savings if they are already maxing out their 401(k). Additionally, HSA can act as an emergency medical fund. You could use your HAS to cover unexpected medical bills during a layoff or some other unplanned life event.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.