What to Look For
To combat rapidly increasing healthcare costs, more and more employers have turned to high deductible healthcare plans for their employees. While employees needs to shoulder the cost of a substantial deductible before plan benefits kick in, they may also have the attractive option of participating in a Health Savings Account (HSA). Much like an IRA, pre-tax payroll deductions accumulate in the HSA tax-free until the money is spent for approved medical purposes.
Now it may sound counterintuitive to recommend not spending the money in your HSA account—after all, it’s meant to be spent on healthcare needs. But think about the HSA another way. HSAs can be a tremendous way of building a nest egg for healthcare needs in your retirement.
Here’s how it would work. Let’s say you and your employer – through matching funds that will vary by company – contribute the maximum $3,100 for an individual or $6,250 for a covered family. Not only does the money reduce your taxable income, it is also tax-free when you take it out, either now or later in retirement, as long as you use the money for medical expenses. And for those of you 55 or older, there is even better news—you can add in another $1,000 per year.
Related: What is Phased Retirement?
Similar to a 401(k) plan, you can invest the money and not incur taxes as your fund grows. If you don’t use the money during retirement, you can arrange to have it passed on to your beneficiaries for their healthcare expenses. One note: you can use the money for non-medical issues, but you will incur a 20% penalty before age 65, or owe income taxes after age 65. In many ways the HSA behaves just like an IRA so think of it as a way to increase your annual IRA or qualified plan contribution.
It’s understandable that people have medical needs for which it makes perfect sense to dip into their HSA funds. That gap before the deductible is met can be quite steep, and you may have medical needs not covered by your plan but approved for HSA spending. For other matters, think twice before you tap your HSA account. There is a mentality of “use it or lose it” at year-end that has people scrambling to spend the money in their accounts on new glasses or other purposes. Again, your HSA fund stays with you—you do not lose it at year-end even if you change employment.
If you are in a position to do so, consider paying out of pocket for these expenses and let your HSA account grow indefinitely. It’s one of the best tax advantages out there if you know how to use it to your best advantage.
There are many other meaningful ways to stretch your dollar in our new e-book: 12 (More) Great Ideas. Do you have a question about how this information applies to you? Email Jim Sacher, CPA or call him at 440-449-6800.