Health Savings Accounts

Health Savings Accounts (HSA) – A tax homerun

Generally, an HSA is a tax advantaged savings account that is used for your current or future health care spending, including long term care premiums.  Similar to a traditional IRA, you get a tax deduction upon contribution to the plan (limited to $3,500 or $7,000 for married in 2019 and a $1,000 higher limit if over 55) which can be made as late as April 15 for the prior year.  You do not have to worry about “use it or lose it” as any leftover funds remain yours and simply accumulate for future use.

 The HSA is better than a traditional IRA as you can take tax-free distributions (like a ROTH IRA) up to your health care spending that year.  The only negative is when you take a withdrawal in excess of your medical expenses you have to pay a penalty up to age 65 (not 59 ½) and that portion is also income, regardless of age.  However, everyone has medical expenses or insurance premiums to pay so it’s rare to have that problem.  You can not make HSA contributions after age 65 (unless you defer Medicare enrollment).

 As an illustration, there are three different levels of using the HSA:

• Level One- You contribute an amount equal to your expected medical expenses. This makes your medical expenses deductible without having to itemize deductions.  You don’t lose a deduction for the first 7 ½ % of your income and you don’t have to exceed $24,000 to get a benefit.  You also get the deduction when you contribute, even when it hasn’t been spent yet.  This is a no brainer.  Everyone should do this.
• Level Two- You contribute the maximum HSA limit. You get a higher deduction, you pay your medical expenses tax-free, and the excess accumulates.  Once enough is accumulated it can be invested (like IRA’s) and grow tax-free.  Eventually, we all have medical expenses.  You can use it as an additional source of retirement funds and pay your Medicare premiums, supplemental plans, drugs and other medical costs income tax free.  If your cash flow is limited, you should consider maximizing the HSA before contributing to a traditional IRA.
• Level Three- Just like Level Two except you use other funds to pay your medical expenses. You have to have the cash flow to do this, but it allows more funds to accumulate tax-free.  It’s a home run for the affluent.

 In summary, everyone should have an HSA.  The high deductible medical insurance plans are usually a good way to lower your net medical outlay, especially if you’re the one paying the bill.  It requires a little discipline to accumulate enough HSA funds to cover your deductible, but the payoff is there.