Mo Vidwans
Many companies these days offer Health Savings Accounts as feasible health insurance plans where you have a very high deductible and a low premium to go with it. Young families, with not too many occasions to get ill, can get attracted to it and for them it actually can work well. When the plan is offered, you can open HSA where you and the company both contribute pre-tax money into that account and you use it to satisfy the medical expenses from this high deductible amount if the need arises. There are just so many advantages offered by this plan that it will be a mistake not to look at it seriously.
The annual contribution limits for HSA in 2020 increased to $3,550 for individual accounts and $7,100 for family accounts. This is how much total contribution can be made to the account from your pre-tax income per year. The company you work for will/could contribute their own money also. These assets can be invested properly and can grow substantially by the time you retire. In the meantime when the medical expenses arise you pay them out from this account, once approved, and pay directly to the provider. No taxes involved for approved distributions; you just have to keep records and file form 8889 at the time of doing tax returns.
It seems all straight forward so far; so where are all the real benefits coming from? The benefits come from how the plan details are handled.
HSA account is treated like a 401k or your own IRA account. That should ring many bells immediately. Your IRA account is your retirement money and it stays with you all the way. So does HSA. Even if you are working for a company and the company encourages you to open an account for a HDHP and most of them contribute to it, it is your account and you take it with you when you leave and use the money for all future legal medical expenses, tax free.
After the age of 65, even though you cannot contribute to it at that point because now you are eligible for Medicare, you can still continue to let it grow and use that money for all the future approved medical expenses; this has to be one of the biggest hidden advantages of having such an account. Health care is among the biggest expenses we will face in our retirement and the wildly disparate estimates, that I am going to quote below, make it hard to plan for. Fidelity estimates that a couple who retires today would need $285,000 to cover medical expenses in their lifetime under ordinary circumstances. The employee benefit research institute (EBRI) estimates that a couple with expensive medications may need nearly $400,000. In the worst case scenarios, it could conceivably go higher. This just goes to show how much we need to be prepared in our golden years for such out of pocket expenses.
To contribute to the plan, especially for an HSA established by the self-employed, the contribution does not have to come from your earned money; anybody in your family can contribute to it. It is in fact an attractive way of filling up the need for making up your annual contributions.
THSA can be used as a checking account to cover current medical costs and/or as an investment account to save for future costs. And this investment part of the account will take you way past your age of 65 when you can start paying the medical expenses from this account including your long term care insurance (LTCI) premiums but Medicare health insurance premiums aren’t typically considered qualified health expenses for a HSA. But your other authorized out of pocket health medical expenses are.
So this creates another interesting scene about your investment philosophy if you have 401k and HSA with your employer. It is wise to fully invest in your 401k at least to a point where you get full participation from your employer which is around 4 percent (generally between 3 and 6 percent). This is free money that you cannot just afford to leave on the table. I would strongly suggest that you should go beyond that and fully participate in the 401k plan which takes you up to $19,500 for 2020. If HSA is available then you should go for it too and get the full participation from the corporation for their contribution besides your own. So far everything you have done is all pre-tax money and full contribution in both from the employer. If it is not possible then I would suggest that 401k should be cut back a bit but make sure that you maintain full contribution from your employer; that is the free money I was talking about earlier.
HSAs are triple tax advantaged. Investors can fund the account with pre-tax dollars, interest earned or growth in the account isn’t taxed and the distributions aren’t taxed when they are used on qualified medical expenses and actually after a certain age, the 20 percent penalty for using HSA funds on non-qualified expenses goes away. At age 65, HSA is a 401k on steroids. If you use it for qualified medical expenses then it is tax free. If you use it for something other than that you are just paying ordinary tax on it. If you are using additional money from your 401k for your medical expenses in retirement, you actually end up paying more taxes on Medicare part B & D because that premium is based on your modified adjusted income. As against that if you use HSA you avoid paying more for your Medicare premiums.
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Mo Vidwans is an independent, board-certified financial planner. For details visit www.vidwansfinancial.com, call +1 (984) 888-0355 or write to [email protected].
