If you have the option of a Health Savings Account (HSA) at work and are not enrolled, you should really consider it. You may have heard about some of the benefits. The primary benefit is that you can use tax-free money to pay for qualified medical expenses. The benefit that people don’t know about is that an HSA plan can function like a retirement account once you turn 65.
Here is a little background information on HSA plans first. An HSA is a plan that eligible individuals can use to save throughout their lives and use the balance of funds to pay for qualified medical expenses. Qualified expenses mean costs like prescription drugs and visits to the doctor. However, they do not include insurance premiums unless you are paying for COBRA benefits or are receiving unemployment income at the time. The balance in your account just carries forward year-after-year. So, there is no use it or lose it provision. If you use the funds for anything besides qualified medical expenses before age 65 the distribution is taxable and a 20% penalty may be assessed.
To be eligible to contribute to an HSA plan you need to have a high-deductible health insurance plan. The deductible on the health insurance plan needs to be at least $1,350 for self only coverage or $2,700 for family coverage in 2018. Your health plan administrator can tell you whether your plan qualifies.
If you are an eligible individual and your plan qualifies, you can contribute up to $3,450 with a self-only health insurance policy or $6,900 with a family policy in 2018. The contributions are deductible against income taxes. What’s even better is if you contribute through an employer plan. The contributions are deductible against FICA and Medicare taxes as well as income taxes. So, employees that contribute to HSA plans can conceivably not ever pay any tax on the contributions made to the plan as long as every nickel is used to pay for qualified medical expenses. Okay, if that is not exciting to you then you can just stop reading now.
Alright, if you are still reading you realize what a big deal that is. So, you can stuff this plan with contributions over your life which you can use to pay for medical expenses tax-free at any point after you establish the plan. Well, what happens when you are older and you want to use some of the money for a non-medical reason. If you are at least 65 years old or disabled, you can withdrawal money from the HSA plan just like a traditional IRA account. The withdrawals which are not used for medical expenses are taxable, but there is no 20% penalty. Furthermore, if you contributed over your working career as an employee then you with have never paid payroll taxes on that money. That is pretty slick huh!
Beyond the tax-free medical expense benefits of Health Savings Accounts, I just told you about another way you can save for your retirement and get a deduction using these accounts. The HSA plans are just another arrow in the quiver of options available to people who want to manage their taxable income. If you would like more information please give me a call.
Dan Busenbark, CPA