Leveraging Health Savings Accounts (HSAs) for Retirement
05.2.2018 – In this blog we will cover the basics of Health Savings Accounts (HSAs), and how to leverage the accounts for retirement.
In an effort to reduce monthly premium payments for companies and participants, the health insurance industry has seen a major shift in plan design. Many companies are now offering High Deductible Health Plans (HDHPs). These High Deductible Health Plans are defined in 2018 as coverage with a deductible of at least $1,350 for individuals and $2,700 for families in which the deductible must be reached prior to insurance coverage kicking in. With the creation of these HDHPs and the subsequent high adoption rate amongst companies and participants, we have seen many employees opening Health Savings Accounts also known as HSAs.
Health Savings Accounts were introduced to help participants in a High Deductible Health Plan offset their large, upfront deductible payments. In fact, in order to open and contribute to a HSA someone must first be enrolled in a High Deductible Health Plan. A HSA allows participants to contribute on a pre-tax basis to a savings or investment account, and then utilize that account to pay for qualified health expenses such as deductible payments, prescriptions, surgeries, doctors’ visits, etc.
Health Savings Accounts are treated similarly to pre-tax retirement accounts with one small difference. Any withdrawals made for qualified medical expenses are tax free. This means dollars are contributed on a pre-tax basis (no taxes on contributions). The earnings on the investments grow tax-free (no taxes on investment earnings). Finally, if you use the dollars for qualified medical expenses, there are no taxes on those withdrawals.
There are two caveats to HSAs. First, dollars withdrawn prior to age 65 years of age for anything other than qualified medical expenses are subject to a 20% early withdrawal penalty. Second, any dollars not used for qualified medical expenses will be subject to taxes at the individual’s effective tax bracket.
Since these contributions are made on a pre-tax basis and individuals may never have to pay taxes on the dollars, the IRS puts an annual limit on the total amount of allowable contributions. In 2018, the limit is $3,450 for those with individual coverage and $6,850 for family coverage. These numbers are up slightly from 2017 and increase periodically with inflation. Individuals age 55 or older are allowed to contribute an extra $1,000 above the annual limits as “catch-up” contributions.
Leveraging the HSA for Retirement
As many of us know, contributions to a pre-tax or Roth IRA as well as corporate 401k plans are limited. In 2018, the IRA limit is $5,500 plus an additional $1,000 for individuals over 50 while the 401k contribution limit is $18,500 plus an additional $6,000 for those over 50. This caps total tax advantaged retirement savings at $24,000 for individual under 50 and $31,000 for individuals over 50 (Note – This doesn’t include an employer matching or profit-sharing dollars contributed on someone’s behalf).
By utilizing the HSA as a savings vehicle. An individual can potentially put anywhere between $27,450 and $38,850 depending on their individual age and the type of insurance coverage they have.
Furthermore, these additional contributions are able to be invested similarly to an IRA or 401k plan. While some individuals prefer to keep their HSA dollars in a savings type account paying a nominal interest rate, many banks and investment companies are now allowing participants to invest in mutual funds. For someone looking to leverage these HSA dollars for retirement, this means that they are able to generate additional return on their contributions.
If you have questions about your current financial circumstances or company benefit plans, please contact Rich Myers at firstname.lastname@example.org or via phone at 614-551-6155.