The Health Savings Account - A Retirement Planning Strategy?
BY PETER GAERTNER
Since 2003, HSAs have been around to assist with paying for qualified health care expenses if covered by a high-deductible health plan at work. At first, they were looked at as a tax-advantageous vehicle to contribute pre-tax funds and use those for qualified medical expenses such as deductibles, co-pays, etc. when occurred. Many people still only look at them in this way, but I want to share a different approach for the HSA with you that may offer additional benefits for the long term.
The triple tax advantage: What if I told you that you or your family could contribute between $3,550 (single) and up to $8,100 per year (if married and over age 55) to an account that has the following characteristics?
Tax-deductible contributions
Tax-exempt investment growth
Tax-free withdrawals (for qualified health expenses)
In addition, unlike Flexible Spending Accounts, funds do not have to be used in the same calendar year and could be withdrawn without any penalty after age 65 (subject to income taxes if not used for qualified medical expenses and a penalty of 20% otherwise). The account also offers for flexibility should you leave your employer, retire or simply change health plans.
Why could this be a planning opportunity? Considering that the single largest expense in retirement will likely be health care costs (with projections for a married couple upwards of $250,000), a case can be made to underline the importance of fully funding, and then eventually consider investing those funds for future healthcare expenses during working years. This opportunity seems to be catching on as HSA assets have tripled in value from 2014 to 2018 alone. This strategy obviously requires that other after-tax funds or savings are available to pay for current health expenses, so it may not be realistic for everyone. However, if you find yourself contributing the maximum amounts allowed to your 401k and/or IRA’s, the HSA may offer another way to reduce your taxable income and allow for future benefits that I described above.
After reading the above, you are probably eager to review your health care plan to determine whether you are eligible for your very own HSA or are logging into your existing account to review the allocation. But not so fast, while the HSA can be a phenomenal planning tool for some, there are some potential drawbacks I wanted to make you aware of as well:
A high-deductible health plan must be existent
You must keep records of any qualified health expenses
Should you withdraw funds for non-qualified expenses prior to age 65, the distribution would be taxable and subject to a 20% penalty
While usually not very high, HSA plans may charge a monthly maintenance fee in your account
Again, while I think that the Health Savings Account can be a fantastic addition to your overall financial strategy, there are many other factors to consider and I would encourage you to discuss this one with your Financial Advisor to see whether it could have a place in your plan.
For additional details on the Heath Savings Account, feel free to follow the IRS link below: https://www.irs.gov/publications/p969