Health savings accounts have been around since 2003, when President Bush improved upon medical savings accounts and flexible savings accounts. HSAs are superior compared to their predecessors because of the triple-tax-free benefits and they are not “use it or lose it.” They are becoming more and more important as our healthcare cost crisis continues, and I predict your HSA will play a significant role in the years to come.
Health Savings Accounts Are Triple Tax-Free
The most attractive feature in my opinion is the triple tax benefit. Here’s how it works:
- Deductible – when you make a deposit to your HSA, you take the tax-deduction;
- Deferred growth – interest, dividends and capital gains are deferred just like a 401(k), IRA, or Roth IRA;
- Withdrawals for qualified medical expenses are tax-free.
Nothing in our tax code can match the triple-tax-free benefit of the HSA. Not even a Roth IRA! Remember, a Roth is funded with after-tax contributions. Another important detail is that if you take withdrawals after age 65 for general retirement expenses (not medical), there are no penalties, you would just pay ordinary income taxes on your withdrawal similar to an IRA or 401(k). (For more from this author, see: Why a 10% Deferral to Your 401(k) May Not Be Enough.)
HSA as Savings Account
My family has utilized an HSA for approximately 10 years since we started choosing high-deductible health insurance plans in an effort to lower our premium (these days we have a high deductible and a high premium, but we will address that problem another day). Our mindset was to fund the HSA, take the deduction, and then use the money in the HSA as we incurred medical costs. The result was that each year we would make the deposit, take the withdrawals, and at the end of the year the balance was close to zero. We were treating it as a reimbursement program. We had a health savings account. The only benefit was the tax deduction.
HSA as Investment Account
But what if we treated it like a health “investment” account? Rather than making the deposit and paying the medical expense from the HSA, we could make the deposit, invest the money in the HSA, and then pay the medical costs out-of-pocket. Over 40 years at 5%, your annual contributions could be worth $600,000! And that’s triple tax-free! A 2016 study by Fidelity estimates healthcare costs for a couple starting retirement today will add up to approximately $260,000. My guess is medical costs will continue to increase at a rate greater than inflation and I believe the best way to combat inflation is to invest. And if your health care costs in retirement end up being less than $600,000, you could use some of that money for general retirement expenses, as noted earlier. In that case, you just pay ordinary income taxes on the amount of the withdrawal, similar to an IRA or 401(k). (For related reading, see: How to Use Your HSA for Retirement.)
HSA Contribution Limits
For 2017, if you are under age 55, your HSA family contribution limit is $6,750. For those over age 55, there is an additional catch-up contribution of $1,000. Please note: to be eligible, you must have the appropriate high-deductible health insurance plan.
Take Action Now
If you already have an HSA, consider depositing the maximum allowed and invest the money to help cover your future needs. If you do not have an HSA, investigate if you’re eligible and get started today! If you are not eligible, consider how an HSA may fit into your 2018 health care plans.
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All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security investment or instrument or to participate in any particular trading strategy. Securities offered through Regulus Advisors, LLC Member FINRA/SIPC. Investment advisory services offered through Peak Wealth Management, a State of Michigan Registered Investment Advisor. Peak Wealth Management is independent of Regulus Advisors.