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If you have a Health Savings Account, or HSA, you probably use it as most people do: to pay your out-of-pocket medical expenses and your deductible for a high-deductible health insurance plan. But what if your HSA could do even more for you? Let’s explore some advantages of health savings accounts you might not know about.
First, though, a caution: an HSA is not the same thing as an FSA, or flexible spending account. With most FSAs, you need to use the funds in the account for medical expenses during a given year, or lose them forever. If you’ve ever gone to the drugstore on December 31 to stock up on aspirin and over-the-counter medicines with your benefits card, you probably had an FSA.
An HSA is different. The funds in these savings accounts, which were first offered in 2004, do not expire. They can accumulate, year over year. If you have an individual health care plan, as of 2018 you can contribute up to $3,450 annually to your HSA. If you have a family plan, the cap on contributions would be $6,850. The news is even better if you’re 55 or older: those who are closer to retirement age can contribute an extra $1000, meaning the contribution limit would be But if you’re 55 or older in 2018, you can contribute an additional $1,000 for a total of $4,450 to an HSA for singles or $7,850 per family per year.
That’s a nice chunk of change to be able to stash away for later. But how can you get the most out of it?
You Can Use Your HSA as a Retirement Account
Just because your HSA has “health” in the name doesn’t mean that you need to use it to pay for health care. Instead, you can use it to bolster the health of your retirement savings. Here’s how.
You can make contributions to your HSA either through payroll deductions, in which case they’re made with pre-tax dollars, or from your own funds, in which case the contributions are tax deductible. (This is true even if you don’t itemize your deductions). If you make your HSA contributions via payroll deduction, as many people do, they reduce your state and federal income tax liability by reducing your taxable income. Even better, if your employer contributes to your HSA, that contribution does not count toward your taxable income. Also, HSA contributions are not subject to FICA taxes.
Ready for more good news? If you leave funds in your account, those funds grow tax-free over time, and capital gains, interest, or dividends on the account are not taxable. Because you are not obligated to withdraw funds, that can mean a lot of tax-free growth. What’s more, if you change jobs, your HSA is easily portable, because you, not your employer, are the account owner.
Withdrawals from Your HSA May Be Tax-Free
Usually, with an account in which contributions can be made pre-tax, like a 401(k) or IRA, you pay income tax when you withdraw funds. To some extent, this is true of an HSA, too, but with one very important exception: withdrawals made for qualified medical expenses are tax-free whenever made.
Withdrawals from a Health Savings Account for qualified medical expenses are tax-free whenever made.
Most people tend to have more health issues, and health expenses, in their later years. If you use the funds you carefully put away in an IRA to pay your medical bills (or for anything else), that money will be taxed upon withdrawal from your account. But if you use funds from your HSA to pay those medical bills, there is no income tax on withdrawal. If you contributed to your HSA by payroll deduction, that means you paid no income tax on the front end or the back end.
Just remember: you don’t need to use withdrawals from your HSA for qualified medical expenses, but if you use them for anything else (as you may after you turn 65), they will be subject to income tax.
Your HSA has no RMD
There’s another advantage to your HSA that you may not be aware of: you are not required to withdraw funds when you reach a certain age. This is another difference between an HSA and an IRA or 401(k). You can simply let the money grow as long as you want to, although you can no longer make contributions to your account after you turn 65.
We’ve spoken of money “growing” in an HSA, but you may be thinking to yourself that savings accounts don’t accumulate a lot of interest or grow very fast. That is unfortunately true these days, but HSAs can be kept in investment accounts, which gives them the capacity to grow more quickly. That said, a study by the Employee Benefit Research Institute (EBRI) found that only about 6% of HSAs are held in investment accounts. To the extent you have control over what company administers your HSA, look for ones with investment options, like Fidelity or Vanguard.
In a nutshell, health savings accounts can be great vehicles for retirement savings, and right now few people are taking advantage of them in that way. The earlier you start, the greater your opportunities. But HSAs can involve fees and other considerations, so they may not automatically be what’s best for you and your family. To learn more about the advantages of health savings accounts, contact our law office. We can help you determine whether using an HSA in retirement planning is right for you.
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