I Think Everyone Should Have A Health Savings Account… do you?
This is not another article about Healthcare. This is about the 2nd best type of Retirement Investment!
Recently I was working on a client’s health insurance and contacted their CPA to understand the tax implications for this client creating a new LLC. Our conversation turned to creating a Health Savings Account (HSA) for this client, and I quickly realized they weren’t aware of the tax advantages of a HSA.
Since we have sold and been proponents of HSAs and their more limited predecessors, MSAs, for 20 years, I was surprised that there are still tax-savvy people out there who don’t understand why HSAs are so GREAT!
First, you need to understand a little background. In order to open a HSA you must have a High Deductible Health Plan (HDHP) that qualifies for use with a HSA. Second, most people who have a HDHP call it an HSA, which can bes a little misleading. The HDHP is exactly what it says…a health insurance policy with a higher deductible and no first-dollar benefits (other than certain allowable preventive care benefits) provided by an insurance company. The HSA is a bank account provided by a financial institution. You must have an HDHP to have a HSA, but you are not required to open a HSA if you have a HDHP.
What is a HSA? It is a designated bank account provided by some financial institutions. It allows the account holder to deposit up to $3,400 if on an individual HDHP or $6,750 for a family covered by a HDHP (which could be the insured + child(ren), insured + spouse, or insured + spouse + child(ren)) into the account(s) TAX FREE each year. These contribution limits rise each year with inflation, and in 2018 individual HDHP insureds can contribute up to $3,450 or $6,900 for family HDHP insureds. If you are over 55 years old you can deposit an extra $1,000 per year.
The money in the account can be withdrawn TAX FREE if it is used on health-related expenses (deductibles, co-insurance, Rx, even vision and dental among other related expenses). Once the accountholder enrolls in Medicare, the HSA acts like a IRA. The money can continue to be withdrawn tax free if it’s used for qualified expenses, including Medicare premiums. Otherwise withdrawls are taxed just like withdrawls from an IRA (you pay income tax).
Why is the HSA so awesome? I read an article a couple of years ago written in the Wall Street Journal by some financial guru. I guess I always knew the advantages of a HSA but I hadn’t seen it compared to other traditional retirement investments. In short, this article indicated the 401K was the best traditional retirement investment. Why? Because your employer typically matches your savings on average 3-5%. This is free money and an instant return. Easy to understand why this is a pretty good retirement investment. But I was surprised when the HSA was shown as the 2nd best retirement investment. The HSA deposits are tax free, the growth is tax-deferred, and the withdrawls are tax free when used for qualified expenses. It’s the ONLY traditional savings account I know of that is tax-advantaged in all phases (deposit, growth, withdrawal).
While you may need to make withdrawls during your working years for health expenses, the investment idea is to allow the HSA to grow until age 65, and then use it to pay whatever Medicare and Medicare Supplements don’t cover. Without a HSA you would pay these expenses with AFTER TAX dollars.
Don’t think you’ll have qualified expenses once you’re on Medicare??? Impossible. I don’t know a single person over age 65 who doesn’t have some sort of ailment, take prescription medication, or have some vision or dental needs. The article referenced above written by the WSJ indicated seniors will experience somewhere north of $200,000 of uninsured medical expenses throughout their senior years. If you are lucky (extremely healthy) and don’t experience any qualified medical expenses then your funds from your HSA can still be withdrawn just like that of an IRA or 401K, so you have still wisely invested.
Lastly, I can’t help but let you know how the HDHP will help you fund the HSA… which means this part of the article is about health insurance…BUT still just as important. Asking us to provide you or your group with a HDHP will reduce your traditional health insurance premium. The premium savings are usually 20-30%. And when you deposit the maximum amount in your HSA, you will experience a significant tax savings. Typically, the premium savings and the tax savings are about the same amount it requires to fund your HSA account annually.
“But now my insurance is not as good”. I disagree. Have you looked at the “Out of Pocket” expenses associated with your plan? Traditional Plans offer a lower deductible and maybe co-pays BUT the “out of pocket” is usually not much different than a HDHP. So if a major medical condition occurs you are not worse off with a HDHP. Alternatively, if you are healthy then why would you want a traditional plan anyway…do you like paying the insurance company more money than they spend on you? Plus, with a HDHP / HSA you have the money in the account to overcome any surprises.
To all of our CPA friends who advise their clients: we encourage you to speak to your clients about the advantages of HSAs to maximize their tax savings.
I am not a tax or investment advisor, nor do I make money when a client opens a HSA. I am simply an insurance broker who understands the advantages of the HSA and wants to share this information with our clients, friends and potential clients. Not only is my family of five insured by a HDHP, and we maximize our contributions annually and limit our withdrawls, but we also offer the HDHP to our employees and make part of their HSA contribution.