With many of Breakwater's clients currently in open enrollment for their 2018 employee benefits, I thought this would be an ideal opportunity to remind everyone about the many benefits of a Health Savings Account (HSA).
An HSA should not be confused with it's lessor cousin, the Health Care Flexible Spending Account (or Health FSA). An HSA is much different in that it allows your unspent contributions to roll over from year-to-year, and in many cases they can be invested for the long-term.
HSAs offer significant tax benefits as they are triple tax-advantaged. Your contributions into the HSA are excluded from income taxes. While the money in your HSA grows and/or earns income, that growth and income is tax-deferred. And so long as the balances are used for qualified health care expenses, the distributions are also free from income taxes.
In order to qualify to make contributions into an HSA, you must be participating in a qualified high-deductible health insurance plan. For 2018, this is defined by the IRS as a policy with minimum deductibles of $1,350 for an individual and $2,700 for a family. Additionally, your health insurance plan must not subject you to out-of-pocket expenses over $6,650 for individuals and $13,300 for families (again for 2018).
If you meet the minimum deductibles and maximum out-of-pocket requirements in your health insurance plan, then in 2018 you'll be able to contribute $3,450 into your HSA as an individual and $6,900 as a family. And if you're 55 or older, you can make an additional $1,000 catch-up contribution. It's important to note that these limits are for both employee and employer contributions. As it's common for employers to make contributions to these plans on behalf of the employee.
When it's time to spend the money, it must be on qualified medical expenses. The IRS has a very broad definition of qualified expenses and you can see a complete list here. The list includes some items you might not expect to see like acupuncture, dental treatments, fertility enhancement, eye glasses, and weight loss-programs.
You can choose to spend your HSA dollars now on medical expenses, or a better strategy might be to pay those expenses out-of-pocket now, and let the money in the HSA grow tax-deferred. Remember – tax-deferred growth is more powerful than taxable growth. As long as you save your receipts from the date you opened the HSA, you can withdrawal an equal amount in the future for any purpose, assuming the withdrawals are equal to or less than your cumulative out-of-pocket expenses.
Whether you spend the money today on medical expenses, or in the future, I would suggest that you plan to use all of the account balance for medical expenses in yours or your spouse’s lifetime. If a non-spouse inherits an HAS, it will be considered taxable income in the year of death and without certain stretch provisions found in other retirement accounts like IRAs.
As with any investment or insurance plan, make sure to review the expenses within the HSA to ensure they are reasonable.
If you make withdrawals that are not for qualified medical expenses (or not equal to or less than past expenses) then you would pay income taxes and a 20% penalty on the distribution. If you are 65 or older, then you would not be subject to the 20% penalty but would be subject to income taxes on the withdrawal.
As always, your situation is unique. Please do not hesitate to contact me should you want to discuss how an HSA might benefit you in more detail.
Thank you, Abe
Breakwater Financial, LLC is a registered investment advisor. The content of this blog post is for informational and educational purposes only and is not to be considered investment advice. If you have any questions regarding this Blog Post, please Contact Us.