Generally, a Health Savings Account (HSA) is not the first vehicle which comes to mind when thinking about planning and saving for retirement. However, aside from the numerous tax benefits and assistance in covering medical expenses, HSAs can be a great way to save for the future. As we age, good health and medical expenses become more uncertain. At Buttonwood, we work with families to stay in front of these concerns and prepare for any potential financial “potholes.” While an HSA isn’t the right choice for everyone, there are many benefits. Could an HSA be a solution for you and your family?
What is a Health Savings Account?
An HSA is a type of savings account which can be used tax-free for qualified medical expenses. Money put into an HSA is pre-tax and can be used for expenses such as deductibles, prescriptions, medical equipment, dental and vision expenses for yourself and family members and much more.
How does a Health Savings Account Work?
In 2021, individuals can contribute up to $3,600 to a health savings account, while a married couple can contribute up to $7,200. If you are over 55, you can add an extra $1,000. Keep in mind, to qualify, you need to be covered by a high-deductible health plan (HDHP) which means your deductible cannot be less than $1,400 ($2,800 if married). By contributing to an HSA, you have a pot of money you can use to cover current medical expenses. However the option also exists to let the assets grow free of taxes which can then be used to fund medical expenses later in life – for example; between early retirement at age 55 and Medicare at age 65.
If the funds in your HSA are not used during the tax year, the total remains in your account. This is a key difference between an HSA and a Flexible Spending Account (FSA). Additionally, your HSA assets can be invested and designed to grow over time. Your HSA is just that; yours. Funds in your HSA can be used over the course of your lifetime, and if withdrawn for a wide range of medical costs, are not subject to tax. You can also designate a beneficiary for your HSA who can also use your HSA assets to cover their medical costs.
Tax Benefits of Health Savings Accounts
Contrary to other tax-advantaged savings accounts, like an IRA, HSAs offer triple tax benefits. There is a tax deduction for contributions, asset growth without taxation, and withdrawals are tax free as long as they are used for qualified medical expenses. If funds are withdrawn before age 65 and for non-qualified expenses, you will be subject to a 20 percent penalty as well as regular income tax. If you wait until age 65 or higher to use funds for non-qualified expenses, the 20 percent penalty will not apply, but regular income tax will.
Maximizing HSA Contributions
Many employers will contribute on your behalf to your HSA, and generally we recommend taking advantage of this benefit. Be aware that employer contributions are considered as part of your overall contribution limit. At Buttonwood, we track contributions by both you and your employer to help ensure you remain within contribution limits.
Maximizing annual contributions to your HSA is one of the best strategies to ensure you are getting the most gain from your account. Furthermore, if you work with your financial advisor to invest assets in your HSA, the benefits of tax free compound growth are leveraged. Generally, HSA investment options include Exchange Traded Funds (ETF’s) as well as mutual funds, but may also include individual stocks and bonds. Assuming medical expenses can be coordinated from earned income, you may be able to grow your account significantly and use HSA assets during retirement when income decreases and expenses may increase.
Is an HSA right for me?
HSAs aren’t for everyone, but it can be a great option worth exploring! For those who are in good health, opening an HSA makes sense to save for future medical expenses while maximizing tax benefits. When healthy, it makes sense to take advantage of a high deductible health plan (HDHP) to keep your monthly health insurance premium lower. The lower premium leaves more room to contribute to an HSA!
On the other hand, if you are experiencing high health care costs, a HDHP and HSA may not be the answer for you. Lower deductible medical plans may end up saving you more than the deduction to an HSA, especially if you need to withdraw assets from the HSA to cover medical costs. Additionally, large families may not see as much benefit from an HSA. With more family members in need of regular medical coverage the risk of someone incurring higher healthcare costs increases and this could drain the HSA.
It is important to talk through the details of your unique situation with a trusted advisor, or our recommendation; your Family CFO, before making decisions. If you would like to explore opportunities, the Team at Buttonwood Financial Group is available for a conversation!