Opening a health savings account (HSA) offers a triple tax advantage. The catch is they are not available to everyone. To qualify, you must be in your employers’ high-deductible health insurance plans (HDHP) and not participate in any other health insurance plans.
In addition, the HDHP must have minimum deductibles ($1,300 for an individual and $2,600 for a family for 2017) and maximum out-of-pocket costs ($6,550 for an individual and $13,100 for a family for 2017). If you are enrolled in a plan that meets these requirements, then you may be able to fatten up your retirement savings with an HSA.
HSAs offer a triple tax advantage: Contributions are tax-deductible. Any interest and earnings grow tax-deferred. Distributions are tax-free when used for qualified medical expenses.
These accounts were created to help people in HDHPs pay for current medical expenses, but the money saved in HSAs also can be used for healthcare or other expenses in retirement.
Unlike flexible spending accounts (FSAs), there is no “use it or lose it” provision. Any money left in an HSA at the end of the year belongs to the account owner and remains in the account, growing tax-deferred, until it is distributed.
An individual can contribute up to $3,400 to an HSA in 2017, and a family can contribute up to $6,750. Also, if you’re age 55 or older, you can make a catch-up contribution and save an additional $1,000 in your HSA each year. The money in your HSA account is yours if you change employers. Most HSAs offer investment options giving you opportunity to grow your savings tax-deferred over a long period of time, if you don’t use the money for medical expenses.
Even if you stay healthy well into retirement, at age 65, the money in an HSA can be used to help pay Medicare premiums tax-free or be withdrawn as a taxable distribution for any non-medical purpose similar to an IRA distribution.
Saving in an HSA gives participants in HDHPs opportunities to set aside pre-tax dollars, grow any earnings tax-deferred, and pay no taxes on distributions, as long as they’re used for qualified medical expenses. It’s a win-win-win opportunity.
So, if you’re already saving for the future in an IRA, 401(k), or another qualified retirement plan – and you have the opportunity to enroll in an HDHP and open an HSA – you may want to consider it.
• Mike Piershale, ChFC®, RFC® is President of Piershale Financial Group. If you have financial questions on this column contact us at Piershale Financial Group, Inc., 407 Congress Parkway, Crystal Lake, IL 60014. You may also email Mike@PiershaleFinancial.com