A Health Savings Account is a savings account that gives individuals a unique platform to save for medical expenses while reducing their taxable income. In order to make contributions to this account, you must qualify by being enrolled in a high deductible health insurance plan (HDHP). An HDHP for individuals in 2019 is defined as having an out of pocket maximum of $6,750, and a minimum deductible of $1,350. For families, an HDHP is defined as having an out of pocket maximum of $13,500, and a minimum deductible of $2,700. An HSA account can be made by individuals or it can be provided and contributed to by employers.
Each year individuals can contribute to their HSA accounts as long as they are in compliance with Federal Guidelines. The federal guidelines consist of being enrolled in an HDHP as well as following the contribution limits. For 2019 the annual contribution limits are $3,500 for individuals and $7,000 for families (Adults over 55 can contribute an additional $1,000 annually).
This account will act like a regular bank account and individuals will receive a checkbook and debit card that is linked to the HSA account. Individuals can then use this money to pay for qualifying medical expenses. These qualifying medical expenses can be found here
HSA savings account acts as a triple tax-advantage savings account. To start, when you make a contribution to an HSA account you do not pay income/FICA tax (401k and IRA must pay FICA tax.) If your employer provides an HSA account, the contributions to this account will come directly out of your paycheck, further lowering your income and your overall taxes. Secondly, when you invest the money that you have saved into the HSA account, that money will grow tax-free. Finally, when you send the money on qualifying medical expenses you do not pay taxes on that expense. There is no other savings account that has all three of these benefits.
The average couple retiring today will need $280,000 to cover health care and medical costs in retirement, according to an annual estimate by Fidelity.
Wouldn't it be nice if that $280,000 was untaxed and spent untaxed? Due to the tax advantages that this account provides many financial advisors would recommend that individuals save into their HSA’s before their 401k accounts. Once a person has saved their a desired balance they can start to invest their HSA money in mutual funds. When their money grows in these mutual funds, it grows completely tax-free. You can spend money from these investment accounts on qualifying medical expenses, that's right, tax-free. It is best explained by Matt Irvine, vice president of sales and marketing at Health Savings Administrators:
“If the contribution goes into my HSA via payroll deduction, it is not subject to FICA,” he explains. FICA, short for Federal Insurance Contributions Act, is the federal income tax that goes toward Social Security and Medicare. “That gives me 7.65% more into my HSA. My 401(k) and IRA contributions may avoid state and federal taxes, but they are subject to the FICA tax,” He later goes on to argue that if your employer does not contribute to your 401K account than you should save money into your HSA before your 401K or IRA. His reasoning lies in the tax savings that this account can provide.
An HSA is not only a savings account for medical expenses but it can also be a vehicle for retirement. Similar to a 401k, you can contribute to this account (with tax advantages) and when you retire you can take the money out. When money is taken out of this account for purchases that do not qualify as medical expenses, it is taxed as income (similar to a 401k). When you retire, however, you should be in a lower income tax bracket bringing you even more tax savings.
HSA accounts are a great way to save for future medical expenses. As the cost of medical care rises it is important to safeguard your future. If you have an HSA account ask your bank how you can start to utilize the advantages in a more effective way. Everyone has different financial needs, understanding your needs and finding the products that are best for you is what we are best at! Give us a call today to find out how you can better safeguard yourself and your future.
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