Let’s talk about the Health Savings Account (HSA). What is it? How do you use it to build wealth? Create an HSA and begin to build wealth tax-free. An often-overlooked tool, an HSA is available to build a slush fund for retirement.
Through the last several years, health insurance has been a changing world. But with a little bit of knowledge and some planning, you could create a sizable nest egg for retirement.
Who Qualifies for an HSA?
To be eligible for a HSA, you must purchase a high-deductible health insurance plan. Many employers offer a high-deductible plan as an alternative to the traditional coverage (first dollar coverage, often with a co-pay). If you purchase your own insurance through the many other options such as the health exchange, then a high-deductible option will be available.
A high-deductible plan is defined as a plan that has a deductible of $1,400 for an individual and $2,800 for a family in 2020 and will remain the same for 2021. In other words, you would be responsible for the first $2,800 of payments for your family’s health care; or, stated another way, you will need to go out of pocket. Once this deductible is met, your insurance will pay the amounts in excess of the deductible. Often there is a copay of some sort as well.
There are plans with higher deductibles but the highest limits are capped. The higher the limits, the lower the premium, but the greater your risk for out-of-pocket expense. Using an HSA effectively can reduce that risk.
Are these high-deductible plans for everyone? No, if you are not healthy and use health care regularly because of some underlying condition, this may not be the right option. However, if you and your family are healthy and use health care for routine care such as well care visits, this is definitely a direction for you to save some money and begin to build your slush fund!
Triple Tax Break
HSAs have the advantage of being triple tax-free.
Contributions are made pre-tax.
Growth is tax-free.
Withdrawals are tax-free when used for a qualified medical expense.
An added benefit is that contributions are free of social security and Medicare tax (a savings to you of 7.65%). So, you get a tax break when you make a contribution and the earnings are tax-free as well. When used for a qualified medical expense, that is also tax-free. You cannot use these dollars to pay premiums. However, in retirement, certain premiums can be paid with these dollars (check the regulations).
HSAs for Retirement
What does an HSA have to do with retirement? When you fund this account, the monies are yours. You can use this account in retirement. The account is always yours. The out-of-pocket expenses you will have with Medicare can be paid with these funds.
Contributions in 2021 are $3,600 for yourself and for a family it is $7,200. If you are 55 or older, you can add another $1,000 as a catch-up contribution. You may be starting to get the idea that this can add up to a nice sum pretty quick. One of the keys as always is to start early. The more years you have to contribute, the better.
As you turn 65, contributions will no longer be an option. Medicare does not have a high-deductible plan and you do not want to miss out on Medicare (it’s important that you get on Medicare at 65). Essentially, your account is frozen to contributions.
As discussed above, the account is always yours, except now you can only invest and use it for medical expenses. If you decided to take all your money out for a non-qualified expense, then it would be taxed like an IRA.
What can an HSA be used for?
There is a long list of medical expenses that qualify (too many to list here). Funds can be used to pay your deductible or copay, eye glasses, dental, dependent care expenses and prescriptions to mention a few. The list goes on and there are specific expenses that qualify. Have a look at IRS publication 502 for a complete list and what qualifies and what does not.
These are always changing, the recent CARES act has expanded what qualifies, so check the regulations.
HSA v. FSA
When comparing the Health Savings Account and the Flexible Saving Account, again, check regulations and with your employer, as some uses may be plan-specific. The primary difference is that an HSA allows you to roll your money over if you do not use it within the year. An FSA requires you to spend all the money within the year. No rollover. Use it or lose it.
Also, FSA contribution limits are lower than an HSA’s.
If you are not taking advantage of an HSA, I ask, why not? Don’t think you can afford it? How about: you can’t afford not to!
Take a look at the premium difference between the first dollar coverage (usually has a copay, so there is out of pocket) and a high-deductible plan. Let’s say the difference is $200 per month. What happens if you put that $200 into an HSA? That would be $2,400 per year. Now you have a start and if you have to pay for your deductible, you have it covered.
The HSA needs to be part of your overall wealth plan before retirement and as part of your retirement. The more time you have between now and 65, the larger your HSA slush fund will be.
An important key is to start! I have given one possible way to fund your account. There are any number of ways you can go about funding.
Think About This:
If you are 20 years away from age 65 and you begin to contribute $200 per month over that period of time based on contributions only, you will have $48,000. And, yes, you can invest these dollars like your 401k or IRA. What would you do with an extra $48,000 in retirement?
Retirement planning requires that you take all potential vehicles into consideration. This is one that is overlooked and with a good plan in place, it can have great benefit! QCBN
By Steve Calabrese
Steven Calabrese, CPA, is the CFO of West Yavapai Guidance Clinic. He also is the owner operator of a website known as thebiweeklyadvisor.com, where such topics as budgeting, investing, paying off debt and goal setting are discussed.