With the high cost of health insurance these days, many people are opting for high deductible health plans (“HDHPs”). Also, with rising incomes and spousal coverage in retirement plans, those same people are finding that they can no longer contribute to IRA’s due to income phase-outs. If you find yourself in that position, there may be a savings solution for you. If you are lucky enough (yes, I said lucky enough) to have an HDHP, a Health Savings Account (“HSA”) may prove to be the alternative retirement solution you have been looking for.
An HSA is a tax deductible account you set up with a financial institution to pay for certain medical expenses, or to reimburse you for certain out of pocket medical expenses. Think about this: A deductible IRA offers a tax deduction up front, but becomes taxable on withdrawal. A Roth IRA gives you tax free withdrawals, but no deduction upon contribution. An HSA gives you both a tax deduction AND tax free withdrawals (provided they are used for medical expenses). If it seems like you are getting the best of both worlds, a tax deduction and tax free treatment, it’s because you are!
Some caveats: Deductibles in your HDHP must be high enough to qualify. For calendar year 2017 the HDHP deductible requirements for an HSA are $1,300 for self-only coverage and $2,600 for family coverage. Also, maximum out-of-pocket amounts (not including premiums paid for health insurance) must be $6,550 for self-only coverage and $13,100 for family coverage.
If you clear the hurdles, deductible HSA contribution limits for 2017 are $3,400 for individuals (self-only coverage) and $6,750 for family coverage. If you are 55 and over you can contribute an extra $1,000 as a catch-up contribution. You do not have to contribute the whole amount, the limits are just the ceiling. HSA’s are not “use it or lose it.” You can carry the balances over from year to year. You don’t even have to use the HSA monies contemporaneously with the medical expenses. If you are fortunate enough to be able to pay the medical expenses now, you can hold onto the medical receipts and take the money out tax free at a later time. You can allow the money to grow tax free for as long as you want/need. Interest and other earnings within the HSA aren’t subject to tax.
Although not meant to be a retirement savings vehicle, if used properly, it certainly can be utilized as tax free retirement savings. Beware, if you use an HSA to pay for unqualified medical expenses, the tax penalty is 20% of the HSA distribution.
Check with your employer (or insurance broker) to see if your health plan qualifies for an HSA. I will be happy to answer any other questions you may have regarding this tax saving vehicle.
Tracy Badgley, CPA, CDFA, CGMA