Paul Tarins, RICP®,WMCP®,CSRIC™
A Health Savings Account (HSA) provides an efficient way for covered individuals to pay out-of-pocket health insurance expenses. The key benefit of an HSA is that it allows people to put away a portion of their paycheck without being taxed. Many people consider it to be one of the most efficient ways to save, regardless of whether a person is saving for a catastrophe or their long-term future. It can be helpful to learn more about how HSAs are commonly used to see if this option is right for you.
Read on as we discuss the typical features associated with a Health Savings Account and why it matters for retirement planning.
Understanding HSAs and HDHPs
HSAs and HDHPs (High Deductible Health Plans) are usually used in tandem. If you want to contribute to your HSA and use it for retirement planning, you need to have a High Deductible Health Plan.
HDHPs tend to have a lower monthly premium compared to non-HDHPs. However, your deductibles before the High Deductible Health Plan begins to pay will be higher than most non-HDHPs.
You also have to check if an HDHP is available in your area. Most areas offer these plans and they tend to be available as qualified health plans on healthcare.gov. There are three levels – Bronze, Silver, and Gold, and you can review which suits you the best.
You can also consult health insurance companies to determine if they offer an HDHP or enroll in a plan through your employer if offered.
Benefits and Other Considerations for HSAs
There are numerous benefits to opening a Health Savings Account for long-term care and retirement planning. These include:
Income and Deductibles
Typically, those who opt for an HSA have a high deductible that they could at times be difficult to pay if they didn't make provisions over time to do so. For example, if a person makes $30,000 a year after taxes and they have a $6,000 deductible, then they would be giving up a full 20% of their income if they have major medical expenses.
An HSA allows you to use pre-tax dollars and pay for deductibles, coinsurance, copayments, and other expenses. These include expenses for oral healthcare, vision healthcare, and medication. In doing so, an HSA allows you to lower your overall healthcare costs.
Given its benefits, HSAs are commonly offered by health insurance companies, so an individual can sign up for the account simultaneously to signing up for their health insurance plan. The government is incentivizing policyholders to prepare for emergencies, so there are fewer delinquent policies. If your insurance policy does not offer an HSA option, it's possible to open a separate account at banks and some financial institutions.
Reducing Your Taxable Income
Having money taken out of your income tax-free is a way to reduce the amount of taxable income you make a year. It helps you maximize your income while simultaneously safeguarding against emergency health situations. Individuals who contribute $2,000 to their HSA a year will be taxed as though they make $2,000 less than their standard income. The money you contribute to your HSA will roll over from year to year, which means the insured can grow their emergency funds over time. While these funds typically can't be used to pay for insurance premiums, they can be used to pay for co-pays, deductibles, and other eligible non-covered expenses.
Ease of Access
Using the funds in an HSA is very easy. Most Health Savings Accounts issue a debit card to the account owner. You can use it to pay for healthcare expenses, such as prescription medication. This applies to medical bills received in the mail too. In such cases, you can get in touch with the billing center and pay the bill over the phone with your HSA debit card. If you have paid the medical bill in cash or credit, you use the HSA to reimburse yourself.
HSAs are great in terms of portability too. Since it is an account under your name, you have control over how you want to use these funds. Even if you choose to change your health insurance plan in the future, switch jobs, or retire, the funds in your HSA will be available. Funds can be used for any qualified healthcare expense tax free. HSAs are also allowed to be used for non-eligible expenses, though they will be taxed as income if the individual chooses to do so. Additionally, prior to age 65, if you use your money for any non-qualified expenses, the IRS will also impose a withdrawal penalty of 20 percent on the amount withdrawn
Maximum Restrictions for an HSA
The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. For individuals, the current maximum is $3,600 and $7,200 for a family. Adults over the age of 55 can contribute an extra $1,000 referred to as a catch-up. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and families can contribute to an HSA on behalf of the individual. The contribution limits for employers generally change every year as well.
How to Use An HSA
Some people use their HSA as a straight savings account while others may choose to invest the money in mutual funds or stocks. Using your HSA as an investment account to purchase stocks or bonds has its benefits, too. It can allow you to potentially increase your returns. As you earn interest or a profit on the money in your Health Savings Account it continues to grow tax deferred. This can be a significant advantage.
That said, it is important to note that using your HSA as an investment account is not advisable for everyone. You should consult a qualified financial planner before you proceed with this option. Making the wrong investment decisions here can lead to the loss of principal.
HSAs offer many advantages, but they do not mix with certain types of federal programs and benefits. For example, if you are enrolled in Medicare Parts A or B, or if you file for Social Security benefits after age 65, you cannot make contributions to an HSA.
If you choose to delay Medicare enrollment because you are still working and want to continue contributing to your HSA, you must also wait to collect Social Security retirement benefits. This is because most individuals who are collecting Social Security benefits when they become eligible for Medicare are automatically enrolled into Medicare Part A. You cannot decline Part A while collecting Social Security benefits.
The takeaway here is that you should delay Social Security benefits and decline Part A if you wish to continue contributing funds to your HSA. Finally, if you decide to delay enrolling in Medicare, make sure to stop contributing to your HSA at least six months before you do plan to enroll in Medicare. This is because when you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty.
Wrapping It Up
An HSA will be helpful for everyone both pre- and post-retirement. It provides resources to pay your health insurance expenses immediately and at any point in time when you are funding your retirement with your various retirement accounts. The truth is that practically anyone can benefit from the tax-free incentives if they so choose.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated