A health savings account (HSA) is a tax-free savings account specifically for health-related expenses. It is a way for you to set aside funds for medical expenses without paying taxes or interest on those dollars, making your money go further when you are faced with paying for medical care and also making it a wise investment strategy. It gives you the best of both worlds – tax savings on the front end and tax free distributions on the back end! Any unused funds roll over from year to year to pay for qualified medical expenses defined by the IRS.
To be eligible to qualify for an HSA, you must meet the following requirements:
- You are covered under a high deductible health plan (HDHP).
- You have no other health coverage except what is permitted under other health coverage.
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone else’s tax return.
You can use the funds for yourself, your spouse and any dependents or persons you claim as dependents on your tax return. There are annual limits to what you can contribute. In 2019, the limit is $3,500 for a self-only HDHP and if you have family HDHP coverage, you can contribute $7,000. If you are lucky enough to be 55 years or older, you can add an extra $1,000 to your contribution!
To make the most of your HSA account from an investment perspective, keep the following in mind:
- After making your full matching contributions to our 401(k), your best plan is to then max out your HSA contribution before increasing your savings into other types of retirement accounts because of the taxes you will save.
- Then, rather than using your HSA to pay for current out-of-pocket expenses, delay taking the withdrawals until after you retire and put the HSA funds in an investment account, allocating them to diversified stocks and mutual funds. This will give your HSA a higher long-term growth rate which will in turn maximize the benefit of tax-free growth.
As HSAs have become more popular, there are several myths floating out there that you need to be aware of so you don’t miss the boat on taking full advantage of the financial opportunities an HSA can provide.
Myth: You can’t use money in the HSA after you sign up for Medicare.
Fact: You can’t make new contributions to an HSA after you enroll in Medicare, but you can continue to use the money that’s already in the account tax-free for out-of-pocket medical expenses and other eligible costs that aren’t covered by insurance, such as vision, hearing and dental care and co-pays for prescription drugs.
You can also take tax-free withdrawals to pay a portion of long-term care insurance premiums based on your age, ranging in 2018 from $410 if you’re 40 or younger to $5,110 if you’re 70 or older. After you turn 65, you can use HSA money to pay premiums for Medicare Part B.
Myth: You can’t contribute to an HSA after you turn 65.
Fact: Eligibility to make HSA contributions stops when you enroll in Medicare. That’s not necessarily when you turn 65.
Myth: This is an important one, so read closely! You must use HSA funds within a certain period of time after you incur medical bills.
Fact: FALSE! One quirk of the HSA rules is that there’s no time limit for using the money after you incur an expense. Say you have knee surgery and pay a $1,000 deductible in cash. As long as you had the knee surgery after you opened an HSA, you can withdraw that $1,000 tax-free from the account anytime — even years later. Here’s the kicker, you need to keep careful track of your receipts for the HSA-eligible expenses. We have in fact had a client bring in a folder with $40,000 of medical receipts from the last 10 years, enabling him to take that amount out of his HSA completely tax-free.
BerganKDV has a team of financial advisors who can help you navigate all areas of your financial life as you prepare for, enter into and live in retirement. Want to learn more about what we can do for you? Start here.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.