What is an HSA (a Health Savings Account), and should you have or use one? Simply put, they are often used to pay for qualified health-related expenses using pre-tax money. As of 2020, an individual can contribute $3,550 and $7,100 for a family with a $1000 catch-up if you are over age 55.
So, how do you leverage one of these? You qualify to have an HSA when you have a high deductible health plan. And guess what? In many cases people can do much better with a higher deductible plan combined with an HSA, than a lower deductible plan.
Here are the benefits explained:
1) Your contributions are pre-tax through payroll deduction or depositing the money into an outside HSA account. It’s also very possible that your employer will match a portion of your contribution.
2) An HSA is different than a flexible spending account. Your HSA is portable meaning that if you leave your job, you can take it with you. A flexible spending account stays with the company. The funds need to be used before you leave your job or you lose the balance. But not with an HSA. Take it and go!
3) Your growth is tax-free. When funds are withdrawn to pay for qualified medical expenses, it’s not a taxable event.
4) HSA accounts allow you to invest your balance in the stock market so you have a real chance to grow your money over time. Some people prefer a fixed rate on their HSA but many prefer to invest for growth.
5) One little known fact about an HSA is that you can do a one-time distribution from your IRA (Traditional or Roth) to make an HSA contribution for any given year. You’re only able to do this once.
6) You can use your HSA to pay for your Medicare Premiums. Most people pay for their Medicare Premiums out of their social security payments, however you can use your HSA to pay make those payments TAX-FREE.
Here are some outside uses and additional neat information for your HSA knowledge:
1) At age 65, your HSA starts looking like a traditional IRA because you can withdraw any unused balance and only have to pay ordinary income tax on the withdrawal.
2) Want to turbo charge your HSA? Instead of using your HSA to reimburse your current medical costs, pay the medical costs out of your pocket. (I know this sounds odd but hang with me for a moment.) Keep your medical receipts and once you retire, withdraw the amount that you have receipts for and take the distribution as a tax-free withdrawal. There is no time limit on when you can turn in the receipts. What this allows you to do is invest your HSA for growth and let the account grow untouched for many years. Your money will compound mightily over time.
3) An HSA is not an IRA so there is not a required minimum distribution on the account. You can let the balance continue to grow over many years.
A Health Savings Account first and foremost is designed to save you on medical costs. However, don’t discount it as a possible use for your retirement savings and strategy. It can often do both!
Live free my friends,
Eric Gaddy
