EP. 35: Health Savings Accounts

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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. It’s been my intent since starting this series to educate people who are looking for better ways to not only invest their money but be able to do so in a tax-efficient manner. In that same vein I wanted to touch on Health Savings Accounts (HSAs) and why they’re not only increasing in popularity but why they make a lot of sense for the everyday investor. And then by the end of this video, you can decide on whether having an HAS would make sense in your financial plan.

Let’s start with what an HSA is. A Health Savings Accounts is a tax-favored savings account that must be accompanied by a qualified high deductible health insurance plan. Contributions made by the employer are deductible to the employer but not taxable to the employee. Contributions by the employee are pre-tax. The account may pay interest or be invested by you the participant to attain a greater long-term rate of return. For young healthy participants, you may want to consider investing a portion of your funds in all equities. Not only all gains tax-sheltered, but if you’re very healthy now you could have the funds available down the road in the years to come. And the real kicker here is that the withdrawals used to pay qualified medical expenses are tax-free. Think about this for a moment, the money is pre-tax into the account. Grows tax-deferred in the account. Then when it’s used for qualified expenses such as contact lenses, co-payments for doctor visits, etc that money isn’t taxed either… This provides the complete avoidance of federal income tax, essentially a triple tax advantage as contributions are deducted when made, investment earnings qualify for continued tax deferral, and qualified withdrawals escape taxation altogether. This can add to huge tax savings over time. And I’d urge you to take advantage of it.

The accumulated value of these accounts carries over from year to year and from employer to employer. There are limits on total contributions, and the high deductible health plan associated with the account must meet certain minimum deducible and out-of-pocket levels. Withdrawals before age 65 not used for qualified medical expenses will be subject to taxation and a 20% penalty. Balances in HSA accounts may be carried into retirement and used to fund eligible medical expenses or lifestyle needs. Any withdrawals in retirement (after age 65) not applied to eligible medical expenses will be included in the account holder's taxable income. So it’s essentially a Traditional IRA at that point. Again if not used on qualifies medical expenses. Spousal beneficiaries may continue tax-free withdrawals for qualified medical expenses following the death of the primary account holder.

To be able to participate in an HSA, an individual must be covered under a qualified high-deductible health plan. Because an HSA provides a method for contributing tax-deferred savings, a higher tax bracket generally means greater benefits as if spent on qualified expenses that money is tax-free. However, each situation needs to be evaluated based on the advantages and disadvantages of this type of account.

I would quickly like to go over some advantages and disadvantages to HAS accounts to help you better decide on whether this makes sense for you. Some of the advantages to be considered when establishing a Health Savings Account include the following: because you have a high deductible health plan, your premium cost will then be lower. Contributions can be made by the employer and/or the employee. You may contribute directly to the custodian up to April 15th of the following year (Above the Line deduction on the tax return) which is similar to IRAs accounts. Your contributions are deductible for Federal tax purposes. Contributions, regardless of source, are non-taxable to the participant. Accounts can be invested for greater return potential, with no current taxation of investment gains. Participants can be reimbursed for eligible expenses paid personally keeping them again, completely tax-free expenses. Account value carries over from year to year. If something was to happen to you, then your spousal beneficiaries may continue tax-free withdrawals for qualified medical expenses. And lastly, withdrawals can be made for any purpose after age 65 without penalty, withdrawals used to fund qualified medical expenses may be made tax free.

Now before you decide on whether this is something you should adopt in your overall financial plan, I want to touch on some of the Disadvantages to Health Savings Accounts that should also be considered include: Individuals and families will incur higher out-of-pocket expenditures to meet the high deductibles required by an HSA. Due to the high deductibles, routine medical treatments and examinations may not happen as frequently, which could ultimately put the participant and family at risk. Excess contributions are subject to a 6% excise tax. In general, for individuals under age 65, withdrawals used for purposes other than to fund qualified medical expenses are subject to a 20% penalty as well as federal income tax. The account holder is responsible for filing Form 8889 to report contributions and to determine the amount of qualified medical expenses. Eligibility to contribute to the HSA ends in the month the account owner enrolls in Medicare. If the designated beneficiary of an HSA is an individual other than a spouse, the HSA status ends at the death of the account holder and the beneficiary has income concerning a decedent.

I want to touch on the Qualifying Expenses for HSAs. I hope I made it clear that for those individuals who enjoy generally good health and can afford the deductibles, contributions to an HSA can be an effective form of current and future tax savings. Not to mention that contributions to an HSA are available to fund what seems like a growing list of medical expenses. So of the more common are found here. If you find yourself on the routine plan with co-pays such as dental or vision, and especially if you are a contact wearer, then I would recommend looking into getting set up with an HSA for tax-free purchases of healthcare items that you use in your daily life.

I hope this helps put HSAs on your radar, and of course, reach out to me if you find you have any questions or would like to go into this in more detail as my team and I are here to help. Thank you for watching and as always thank you for giving your finances the attention that they deserve.