About Health Savings Accounts
If you qualify for one, a Health Savings Account is an incredibly compelling way to pay for your future medical costs. Not only does it allow you to bypass the 7.5% threshold for deducting your medical expenses, it also provides for tax-free growth when you use the proceeds for medical expenses. With significant medical expenses in retirement all but guaranteed, a Health Savings Account is a great tool to save for retirement. As compelling as HSAs are, there are a number of misconceptions about how they work and how you can use the funds held in them. Our goal today is to dispel some of the common myths that surround Health Savings Accounts.
1. You need to use HSA money before the end of the year
HSAs are frequently mixed up with flexible spending accounts, which require you to use the funds in the account before the end of the year or lose them. With an HSA the money in the account is yours to keep until you need it.
2. You can’t use your HSA after enrolling in Medicare
While you cannot continue to contribute money to your HSA after enrolling in Medicare, you can continue to use the funds that are already in the account to pay for your medical expenses. In fact, once you turn 65 you can also use your HSA funds to pay your Part B and Part D Medicare premiums. If your Medicare premiums are paid directly out of your Social Security benefits you can withdraw the same amount from your HSA to reimburse yourself.
3. You can only open an HSA if your employer offers them.
As long as you meet the eligibility requirements, you can open an HSA and start contributing on your own. Many banks and other financial institutions offer Health Savings Accounts. However, if your employer does offer an HSA you are likely better off setting one up through them since many employers make direct contributions to employee’s HSA and will likely also cover the administrative fees of the account.
4. You need to withdraw funds in the same year you pay your medical expenses.
Many HSA providers will give you a debit card that you can use to pay your medical expenses directly out of your HSA. However, you can also pay your medical bills out of pocket and then withdraw funds from the account to reimburse yourself. There is no time-frame in which the reimbursement needs to be made. As long as a medical expense is incurred after you set up your HSA, you can wait five, ten or even fifty years to reimburse yourself out of the account. However, the longer you wait the more difficult it may be to prove that the expenses were not already reimbursed in a previous year if the IRS chooses to question the reimbursement so it is best not to wait too long to reimburse yourself.
5. You can only use HSA funds for family members covered under your insurance plan
The amount of money that you can contribute to your HSA is dependent on whether your health plan covers your family or just yourself. You can contribute up to $3,500 annually if you have a single plan or $7,000 if you have a family plan. However, even if your health plan only covers yourself and your other family members are on a separate plan, you can still use your HSA funds to cover any medical expenses for your spouse or dependents.
6. You don’t need one if you are healthy.
Even if you don’t expect to have significant medical expenses anytime in the near future, you are very likely to have large medical expenses later in life. When viewed as a retirement planning tool rather than an emergency medical fund, the HSA beats both traditional and Roth retirement accounts by allowing for pre-tax contributions and tax-free distributions when used for qualified medical expenses.
The Health Savings Account is a powerful tool to prepare for any unexpected medical costs while also saving for retirement. If your healthcare plan qualifies as a High Deductible plan you should strongly consider the benefits offered by an HSA and if you are choosing a new healthcare plan you should look at plans that will qualify for a Health Savings Account.
Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.