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Health Savings Account Awesomeness This Open Season

Brad Bobb CFP® | September 23, 2018

I have written before about Health Savings Accounts (HSA) and how wonderful they are, but with open season on the horizon I thought it was time to freshen up on our HSA knowledge. There are a few characteristics of HSAs that most people aren’t aware of.

Not all pretax accounts and contributions are created equal, therefore it pays to understand how they work. Health Savings Accounts are designed for people with high deductible health insurance plans. A high deductible plan is defined as insurance with a deductible of $1,350 for an individual or $2,700 for a family.

If you have a HDHP then you are eligible to contribute to an HSA. Contribution limits to HSAs are $3,450 for individuals and $6,900 for families. Your insurance company may offer an HSA, or you can set one up through some banks and financial institutions.

Health Savings Accounts are often forgotten when people are putting their savings plans, or retirement plans together, however, they are a phenomenal tool to use. If you don’t have one yet, now is the time to look into one. Below is a list of seven things that you should know about HSAs.

  1. You don’t have to use your contributions every year. Many people get HSAs confused with a Flexible Spending Account. While the two are similar, they are NOT the same. Health Savings Accounts don’t require you to use your contributions every year like FSAs do. Your contributions can stay in the plan from year to year.
  2. No FICA taxes are paid on HSA contributions. FICA (Federal Insurance Contribution Act) taxes are paid up on earned income up to a limit of $128,700. Employees contribute a total of 7.65% of income to FICA. Employees pay FICA on all 401k contributions but not on HSA contributions that are deducted from your paycheck.
  3. You don’t pay any taxes! All HSA contributions are pretax, and withdrawals are tax free if used for qualified medical expenses. Again, pretax dollars that can be withdrawn tax free!
  4. HSA contributions can grow. Most HSAs will allow you to invest your contributions in mutual funds and exchange traded funds. Investing the funds can help with tax deferred growth in your account.
  5. HSA contributions can be used for retirement income. If your contributions don’t get used for health-related expenses, you can use your HSA to provide retirement income. Once you turn 65 you can make withdrawals and pay taxes just like you do from an IRA.
  6. You can name a beneficiary. An HSA will pass on to your named beneficiary at your death, but the rules are a little different than they are for an IRA. The ideal scenario is to name your spouse as beneficiary so that the spouse can use the HSA for their own medical expenses (they don’t need a high deductible health plan to be able to use funds from the HSA).
  7. You can delay taking distributions out tax free. One clever way of allowing your HSA more time to compound and getting tax free income in retirement is to delay distributions. If you can pay health expenses out of pocket while you are working, it may be beneficial to save your receipts and take out tax free distributions once you retire. For example, if you have accumulated $30,000 in qualified health expenses while working, once you turn 65 you could take the $30,000 out of your HSA income tax free.

Health Savings Accounts should be evaluated as savings vehicles just like 401(k)s, IRAs, TSP, and Roth IRAs are. They are yet of another element in a well-constructed retirement plan. If you are looking for a CFP to help you on your financial journey you are welcome to schedule an introductory call with Brad.

Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.