With the first year of the new Tax Cuts and Job Act behind us, tax-efficient saving seems to be top of mind for many Americans. In a world of uncertainty, why not utilize a savings vehicle you can control to help with medical costs?
USING AN HSA
A Health Savings Account, or HSA, is available to anyone enrolled in a high-deductible health care plan. Many confuse an HSA with a Flex Spending Account or FSA – don’t make that mistake! A Health Savings Account is typically much more flexible and allows you to roll any unused funds over year to year, while a Flex Spending Account is a “use it or lose it” plan.
WHAT AN HSA CAN COVER
Many employers who offer high-deductible plans will often contribute a certain amount to the employee’s HSA each year as an added benefit, somewhat like a 401k match. Dollars contributed to the account are pre-tax, and tax-deferred earnings accumulate. Funds withdrawn, if used for qualified medical expenses (including earnings), are tax-free.
The list of qualified medical expenses can be found at irs.gov; however, just to give you an idea, they include expenses to cover your deductible (not premiums), co-payments, prescription drugs, and various dental and vision care expenses.
As always, consult with your financial advisor, tax advisor, and health savings account institution to verify what expenses qualify. If you make a“non-qualified” withdrawal, you will pay taxes and a 20% penalty on the withdrawal amount.
HERE ARE THE DETAILS FOR 2019:
Individuals
Must have a plan with a minimum deductible of $1,350
$3,500 contribution limit ($1,000 catch-up contribution for those 55 or older)
Maximum out-of-pocket expenses cannot exceed $6,750
Family
Must have a plan with a minimum deductible of $2,700
$7,000 contribution limit ($1,000 catch-up contribution for those 55 or older)
Maximum out-of-pocket expenses cannot exceed $13,500
WITHDRAWING FROM AN HSA
Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA. However, funds can be withdrawn for any purpose, medical or not, and you will no longer be subject to the 20% penalty. The withdrawal will be included in taxable income, as with an IRA or 401k distribution. This can present a great planning opportunity for clients who may want to defer additional money, but have already maximized their 401k plans or IRAs for the year.
Although you have to wait longer to avoid the penalty than with a traditional retirement plan (age 59 ½), this investment vehicle could reduce taxable income in the year contributions were made, while earnings have the opportunity to grow tax-deferred and tax-free.
As you can see, a Health Savings Account can be a great addition to an overall financial plan and should be considered if you are covered under a high-deductible health plan. No one likes medical expenses, but this vehicle can potentially soften their impact.
Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®
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