Could a Health Savings Account Be Right for You?
Since their inception in 2003, the popularity of Health Savings Accounts (HSAs) has been on the rise. For years it was the lesser known of the tax-advantaged retirement saving options, but more and more Americans are taking advantage of the opportunities HSAs afford to (1) reduce taxable income, (2) pay medical expenses with pre-tax money, and (3) increase savings for retirement.
What is a Health Savings Account?
Health Savings Accounts (HSAs) are government-regulated savings accounts that allow you to use pre-taxed income to cover health care costs that aren’t otherwise covered by insurance. But there’s a catch: they are only available to the policyholders of qualifying High Deductible Insurance Plans (HDIPs). Each year the IRS releases the qualifying deductible minimums and contribution maximums.
For 2019, the IRS defines “a high deductible health plan” for an individual with self-only coverage as a plan with a deductible no lower than $1,350 and annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) that do not exceed $6,750. For families, the plan must have a deductible no lower than $2,700 and out-of-pocket expenses that do not exceed $13,500.
The 2019 annual contribution limit to an HSA for an individual with self-only coverage is $3,500 (a $50 increase from 2018) and $7,000 for an individual with family coverage (a $100 increase from 2018). It’s important to remember that both employer and employee contributions count toward your annual limit, so you’ll want to keep track of your contributions over the course of the year. Exceeding your annual limit will expose you to a 6% excise tax.
3 Times the Tax Benefits
One of the primary reasons HSAs continue to rise in popularity is because of the triple tax advantage they offer investors:
- Contributions to the account are tax deductible, reducing the amount of federal income tax owed. Or if contributions are made directly as a payroll deduction, they are pretax.
- Withdrawals made for qualifying medical expenses are tax-free, as well. Qualifying medical expenses include most services provided by a healthcare provider including diagnostic tests, prescriptions, sports medicine, and even substance abuse treatment.
- At the federal level, the money in your HSA grows tax-free. That is, you aren’t responsible for paying annual taxes on the interest the account earns. (Note that while most states adhere to this federal standard, some do not. Some states tax HSA contributions and/or earnings, so it’s best to check your state’s policies to be sure).
Tax-Sheltered Savings for Retirement
Not only do HSAs allow you to cover current medical expenses, they act as a tax-sheltered vehicle to save for the future.
Unlike traditional Flexible Savings Accounts (FSAs) or health reimbursement accounts that require policyholders to “use or lose” allocated funds within the calendar year, HSAs have no expiration date. And even if you change jobs or discontinue working, you won’t lose or forfeit your investment.
This can be especially useful if you don’t currently have a lot of out of pocket healthcare costs. Investing your HSA account for future growth will allow you to build a reserve that you can use for medical expenses in the future.
If you’d like to learn more about leveraging the tax-advantaged structure of an HSA to cover medical expenses and build assets for the future, one of our dedicated Certified Financial Planners at Century Wealth Management would be happy to answer your questions. Let’s schedule a complimentary consultation to discuss how we can help you improve your financial wellness today.