What are the benefits of a health savings account and how do they work?
This is a financial tool that is underutilized and yet offers potentially a triple tax benefit to qualified taxpayers. I believe that we can all agree this is worth exploring further.
Health Savings Accounts (HSAÕs) offer three ways to save. Contributions are tax deductible, earnings and interest from investments grow tax deferred, and withdrawals made for qualified medical expenses are tax-free. This is a trifecta in tax benefits!
To take advantage of this, you must first determine if you are eligible for a HSA. You must be covered under a high deductible health plan (HDHP). You must not be covered under any other plan such as, your spouseÕs health insurance, enrolled in Medicare or Tricare, receiving VeteranÕs health benefits, or being claimed as a dependent on another personÕs tax return. Medicare enrollees will not be eligible for new accounts or contributions while enrolled in Medicare but, they can utilize an already established HSA for qualified expenses.
If eligible, then you, your family members, and your employer may contribute to your HSA. You may contribute outside of payroll deductions but must stay within the contribution limits. The deadline to contribute is normally the same as the tax filing deadline every year.
The high deductible parameters for HDHP in 2018 are as follows: an individual $1,350 minimum deductible with a maximum out of pocket of $6,650; and for a family $2,700 minimum deductible with a maximum out of pocket of $13,300 annually. The contribution limits for HSAÕs in 2018 are: $3,450 for an individual, $6,900 for a family and catch-up contributions of $1,000 for those over age 55.
Withdrawals for qualified medical expenses are tax-free however, if you use withdrawals for non-qualified expense then you will be subject to a 20% penalty. This penalty does not apply after you have reached age 65, become disabled or are deceased. Upon death your HSA will be treated as your spouseÕs if your spouse is listed as the beneficiary. If not then the HSA is taxable at fair market value the year in which the owner died. This is a good time to remind readers to periodically review the beneficiary designations on all of your financial accounts.
Some qualified expenses are prescription medications, over-the-counter medications for which you have a prescription, insulin, and certain insurance premiums. Long-term care premiums, COBRA and health care while receiving unemployment benefits are covered. Medicare and other health care costs for those age 65 and older are covered but not for Medicare supplement premiums. You may also be able to use your HSA to pay expenses for other family members.
Your HSA custodian will report your contributions and withdrawals to the IRS using forms 1099-SA and 5498-SA respectively. You the account holder will also receive a copy of these forms but the custodian is not responsible for monitoring your contributions or determining the eligibility of your qualified expenses. Generally you will pay a 6% excise tax on excess contributions and there are conditions to meet if you wish to withdraw the excess.
Utilizing a HSA to pay for medical expenses in retirement is a worthwhile strategy. Estimates of healthcare expenses for retirees on Medicare range from $150,000 to almost $300,000 throughout their retirement. On average Medicare covers approximately 40% of those expenses leaving retirees with a potentially catastrophic liability for healthcare expenses when they are living on fixed incomes. As always, consult with your team of professionals, tax, legal and financial. Until we talk again, be well.
Dale Immekus is the owner of Dedicated Financial Services and an accredited wealth management advisor. Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Dedicated Financial & Insurance Services and IFG are unaffiliated entities.