Although U.S. health care may be a highly debated issue, there’s little doubt that health savings accounts (HSAs) are a growing bright spot for the industry.
HSAs are tax-friendly savings and investment accounts created by the Medicare Act of 2003. The accounts allow holders with qualifying high deductible health plans (HDHP) to pay for eligible medical expenses. HSAs are individually owned, which means you take them with you when moving to another job or changing insurance carriers. In addition, you can shop for the HSA that gives you the best investment option and make it a part of your retirement strategy.
The accounts have grown in popularity over the past 15 years. As of 2016, 59 plans reported nearly 20.2 million HSA account holders. 1
The tax advantage
The biggest advantage of an HSA is that you contribute pretax income, the money grows tax-free, and you don’t pay tax when you withdraw if to use for eligible medical expenses. Because you’re putting pretax money aside, it also lowers your overall taxable income. You or your employer can contribute money tax-free to your account up to the annual limit set by the IRS. For 2018, the limit is $3,450 for individuals and $6,850 for families.
HSAs for retirement savings
Think of your HSA as an investment. Some work as simple savings accounts and offer interest. 2 Others let you invest money in mutual funds, just as you would in a 401(k) or IRA. 2
Money in an HSA rolls over from year to year, which means if you don’t have any medical expenses or if you can afford to pay them out of pocket, you can save your HSA as a medical insurance policy for the future. You can even designate a beneficiary who will receive the account at the time of your death.
If you use the account for nonmedical related expenses and are under age 65, there is 20% penalty associated with the expense. Once you turn 65, however, you can use it for nonmedical expenses without paying a penalty, but you will pay the income tax. 3
If you’re looking for an HSA or have any questions on how they work contact us and we can help.
1. 2016 Survey of HSA Accounts, www.ahip.org
2. US News Money, 10 Ways to Maximize Your HSA, https://money.usnews.com
3. Forbes, What if you use your health savings debit card for takeout? www.forbes.com