Health Savings Accounts: The Triple Tax Treat
What is a Health Savings Account?
A Health Savings Account (HSA) can best be described as a personal savings account where the money can be used only for qualified medical expenses. This investment account, created by the Medicare Act in 2003, provides people with a convenient way to save for any unexpected future medical costs they might encounter. Notice that I said investment account. That means contributions do not need to be kept in cash; they can be invested into the stock market and thus have potential organic appreciation.
Triple Tax Treat
· HSAs allow for pretax/tax-deductible contributions
· Any growth within an HSA is tax-free
· HSA withdrawals used for qualified medical expenses are not taxed
For example, in 2016 Bobby deposited $1,000 in an HSA to help pay for medical expenses for the anticipated birth of a new baby the following year. By the time the child was born in 2017 and Bobby withdrew the money to pay the bills, that $1,000 contribution had grown to $1,300! Bobby’s initial deposit of $1,000 was tax deductible. The $300 increase in value was tax free. The final $1,300 withdrawal used for hospital bills was never taxed. That is three separate occurrences where taxes were avoided and in return greatly benefited Bobby and his family.
Requirements to Participate in an HAS
· Must not be age 65 and enrolled in Medicare
· Cannot be claimed as a dependent on someone else’s tax return
· May not have other medical coverage (other than certain types of allowable insurance, such as dental, vision or long-term care coverage)
· Must have coverage under a qualifying high-deductible health plan
So, what is a Qualifying High-Deductible Health Plan?
Federal law defines a high-deductible health plan as one with a minimum health insurance deductible of:
· $1,350 for self-only coverage
· $2,700 for family coverage
The 2019 limits for annual out-of-pocket expenses under the plan (including deductibles, copays, and coinsurance) are:
· $6,750 for self-only coverage
· $13,500 for family coverage
HSAs can be an integral part of your retirement planning and could greatly benefit your family for both known and unknown medical expenses down the road. Medicare will be available for those 65 and older, but even that doesn’t cover all expenses. By some survey estimates, a 65-year-old retiree may need to set aside as much as $250,000 over the remainder of his or her life for medical expenses. According to the most recent health care spending data, Americans spent $3.5 trillion (or $10,739 per person) on health care last year—and that number is expected to continue to climb. Plan accordingly.
—Brant Jones, CFP®