Many households, especially higher-income households, have gained increased interest in using Health Savings Accounts. Often times, they have heard of the advantages a HSA can provide: a pool of tax-exempt dollars for health care, a path to tax savings, even a possible source of retirement income after age 65. With these benefits, we've seen many of our clients that we serve in the Murfreesboro, TN area take advantage of HSAs.
To be able to fund a HSA, you must enroll in a high-deductible health plan (HDHP). A HDHP is not ideal for everyone, but it can work well for some households. If you're employed, aHSA is funded with tax-free contributions. Some employers will even provide a matching contribution on your behalf. If you're self-employed, contributions to a HSA are deductible.
HSAs offer you three potential opportunities for tax savings. Your account contributions are tax free (that is, tax deductible), the earnings in your account grow tax free, and you can withdraw funds from your HSA, tax free, so long as they are used to pay for qualified health care expenses, such as deductibles, co-payments, and hospitalization costs. HSA funds may not be used to pay health insurance premiums.
A Health Savings Account has the following tax benefits:
- Contributions through an employer are always pretax
- You can invest the funds after your account balance reaches a certain level
- Distributions for qualified health expenses aren't taxable
- At age 65, you can even turn to your HSA for retirement income.
Current federal tax law allow an HSA owner 65 and older to withdraw HSA funds for any purpose, penalty free. You can use the an HSA to pay Medicare premiums (other than premiums for a Medicare supplemental policy, such as Medigap) or extended-care insurance premiums. No Required Minimum Distributions (RMDs) are ever required of HSA owners. Keep in mind, however, if you take a distribution that is not used for a qualified medical expense, the money may be taxable and a penalty could apply, depending on your age.
A HSA seems less attractive for some people due to the high-deductible health plan. When you enroll in one of these plans, you agree to pay all (or nearly all) of the cost of medicines, hospital stays, and doctor and dentist visits out of your pocket until that high insurance deductible is reached. Households must plan for the ongoing premium for the HDHP, annual deductible, and save into an HSA. Also, if you are a senior (or a younger adult) with a chronic condition or illnesses, you may end up spending all of your annual HSA contribution and reducing your HSA balance to zero year after year. That works against one of the objectives of the HSA – the goal of accumulation, of growing a tax-advantaged health care fund over time.
Should you not need the funds, HSA contributions can remain in your account to be used for future medical bills at any time. In short, this means there is no "use it or lose it" penalty.
Keep in mind that if you spend your HSA funds for non-qualified expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for non-qualified expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.
As a Financial Advisor in Middle Tennessee, we often see how HSAs are beneficial to clients. If you're interested in utilizing a HSA, consult your health insurance provider to review the HDHP options. We also review these situations to help them determine the best fit.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.