Health savings accounts are becoming a more common vehicle to save for retirement. Traditionally they have been used as a savings account to pay for expenses associated with a high-deductible health insurance plan. But in anticipation of increasing healthcare costs, these accounts are now being considered as a retirement savings vehicle. Here are questions to explore as you consider using a health savings account (HSA).
What is a health savings account?
A health savings account is an account that is established to use pre-tax contributions to pay for qualified medical and dental expenses. There are two primary requirements for contributing to an HSA: You must be a participant in a high-deductible health plan (HDHP) and you cannot be a participant in Medicare.
Are there other requirements besides having to be a participant in an HDHP and not participating in Medicare?
Yes. You cannot participate in any other healthcare reimbursement accounts such as a flexible spending account or healthcare reimbursement account. Also, you cannot participate in any other health insurance plans alongside the HDHP (supplemental plans relating to dental and vision are permitted).
What tax benefits are available to individuals and families that contribute to an HSA?
Tax benefits associated with an HSA are plentiful. It’s one of the few tax strategies that remain in which income is tax-free.
Payroll contributions to an HSA avoid federal and state income tax in addition to payroll tax (FICA and FUTA). Moreover, as long as money spent from the HSA goes toward qualified medical and dental expenses, it avoids income tax on the way out as well.
What’s the maximum amount I can contribute to a health savings account?
In 2020, the maximum amount an individual can contribute and deduct is $3,550; for families it’s $7,100. If you are age 55 or older, an additional $1,000 catch-up contribution is permitted. Depending on your age and tax filing status, the tax savings associated with contributing to an HSA can total thousands of dollars.
We recommend scheduling time with your tax advisor to review these tax benefits and how they apply to you.
I already have a flexible spending account for my healthcare expenses. What’s the difference?
Unlike flexible spending accounts, the balance in your HSA is allowed to accumulate and grow tax-deferred just like a retirement account. Any unused dollars contributed to the account carry forward to future years. This helps you stash money away for later years when healthcare expenses typically rise. With a flexible spending account, however, any unused dollars at the end of the year are forfeited and lost.
How do I balance the higher cost of participating in a HDHP with the tax benefits of contributing to an HSA?
The answer to this question will differ for each individual. We recommend scheduling time with your employer’s benefits department and your Planning Alternatives Wealth Advisor to evaluate your options.
How do I open an HSA if my employer doesn’t offer one or I’m self-employed?
There are a number of banks and financial institutions that offer an account called a “stand-alone” HSA. These are HSA accounts you can open and make a tax-deductible contribution outside of your payroll. These same institutions often offer convenient debit card privileges that make paying healthcare expenses easy.
What happens if I pass away before spending the balance in my HSA?
When opening an HSA account, you will be required to name a beneficiary. If a surviving spouse is the beneficiary, he or she can roll the balance into their own HSA. If a non-spouse is the beneficiary, the HSA becomes taxable to the beneficiary in the year in which you pass. As long as you name a beneficiary other than your estate, the balance of an HSA will avoid probate.
What does the IRS consider a “qualified medical and dental expense”?
The list of expenses considered a qualified medical and dental expense is broad, and can be found in IRS publication 502. Certain health insurance premiums like Medicare Part B and Part D are considered a qualified expense along with premiums for long-term care insurance.
What’s the deadline for making a 2020 HSA contribution?
Individuals have until April 15, 2021 to open and contribute to a stand-alone HSA account. If you’re considering contributing through your employer, make the HSA option an item to review during your next open enrollment period.
Where can I get more information on health savings accounts?
IRS publication 969 is a great resource. Could an HSA be your new IRA? If you think the answer is yes, please schedule a time with your Wealth Advisor to begin a discussion. If you’re not sure, give us a call and let’s find out together.