Planning Article
August 2024 – By Shelley Lein CFP®
One of the most powerful savings tools is a Health Savings Account. An HSA has better tax benefits than both Roth and pretax retirement savings accounts, provided the distributions are used for qualified medical expenses. If you meet the requirement of having a High Deductible Health Plan (HDHP is a health plan with a deductible of at least $1600 for self or $3200 for family in 2024), it can be a tool to not only save on taxes but to provide for medical expense coverage in retirement.
The Triple Tax Advantages are:
1. You can deduct contributions from your income on a pre-tax basis, either through payroll deductions (if your employer offers) or on your tax return (you have until April 15 filing date to make the contribution to an individual account)
2. All contributions grow tax-free for as long as they are in the account so you could let it grow just like another Roth account! This could help you have more for medical expenses during retirement.
3. Withdrawals are tax free no matter when taken out as long as you have documented the expenses being reimbursed (any qualified medical expense since the account was opened). This could allow you to collect receipts/expenses and reimburse yourself in the future when additional funds are needed, allowing for more tax-free growth as well as the tax tree withdrawal.
Unlike an FSA (Flexible Spending Account), the funds in an HSA do not have to be used up at the end of the year (or shortly after). Even if you change jobs, it can remain invested or can be rolled over to another account for further growth. Most employer HSA plans and all individual HSA investment accounts allow you to invest funds in a wide choice of funds. Many employers now make contributions to your HSA, making it even more attractive.
It may be beneficial to change to an HDHP if you have a choice of health plans and you can anticipate your healthcare expenses. HDHP usually has a lower premium so the trade-off may be to your advantage. You will have to choose between a FSA and a HSA as you cannot do both.
There is also the ability to pay for some of a long-term care policy’s premium (coverage amounts set annually by the IRS) from HSA funds. If the premiums are paid over several years (vs a single premium), you may be able to pay a portion from your HSA annually.
Even if you do not use the HSA funds during your lifetime, your HSA funds will be transferred to your spouse (non-taxable) or heirs (taxable) for them to use. Since HSA funds are taxable to heirs, the surviving spouse should use the funds before any Roth accounts, which would not be taxable.
If it is right for you, an HSA can be a powerful savings tool.
Note: A High Deductible Health Plan is a medical insurance plan with a deductible of at least $1600 for an individual or $3200 for a family in 2024. It must limit annual out-of-pocket expenses to $8050 for an individual or $16,100 for a family. Unfortunately, Medicare does not qualify for HDHP so you must contribute before you turn 65 or be working for an employer who has more than 20 employees which could allow you to delay signing up for Medicare if you have other health insurance.
Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.Vantage Financial Partners Limited is not a tax advisor. Please consult a tax professional for any specific questions regarding your tax situation.