Financial Planning

As featured in Manning & Napier’s Guide to Financial Planning, Prosper. To get your complimentary copy, and to read the full article, visit go.manning-napier.com/Prosper.

Does your employer offer a high-deductible health plan (HDHP)? If so, you have access to a powerful savings vehicle, the Health Savings Account (HSA). HSAs are tax-favored savings accounts that you can use to pay the high deductibles associated with HDHPs. Once the maximum out-of-pocket costs are met, insurance typically covers any additional costs, and the money left in your HSA earns interest and is yours to keep.

HSAs and FSAs (Flexible Spending Accounts) are often confused with one another. Unlike a flexible spending account, HSA assets do not need to be used by a certain date, are investable, and portable between jobs. This means the cash saved in an HSA can compound over the years and become another significant source of savings. FSAs need to be used on medical expenses, and any unused money leftover at the end of the year in an FSA is no longer yours. When you consider that the average 65-year-old couple is projected to spend $275,000 on healthcare in retirement, the potential value of these vehicles starts to sink in.

HSAs also offer a triple tax benefit to consumers. First, contributions are tax-free and can generally be made through pre-tax payroll deductions. There is, however, a limit to how much you can contribute on an annual basis. You may have seen the IRS recently announced a revenue ruling, which allows taxpayers to stick with the original $6,900 contribution limit for families for 2018, without facing excess contribution penalties. Here’s the backstory: In March 2018, due to the new inflation-adjustment calculations imposed by the Tax Cuts and Jobs Act, the IRS announced that the $6,900 limit would be reduced to $6,850. However, this would have negatively affected taxpayers who had already funded their HSAs for the year. After receiving many complaints, the IRS reverted to the original $6,900 for 2018. (The contribution limit for single coverage is $3,450 in 2018). Additionally, participants over age 55 are allowed a catch-up contribution of up to $1,000.

Second, while HSAs are often set up like personal savings accounts and likely earn similarly low interest rates, there is the potential to invest HSA assets. Once invested, assets grow tax-free. When deciding how much of your HSA assets to invest, it’s important to consider how much cash you’ll need on hand to cover your deductible or if you have sufficient funds outside of your HSA to cover those amounts. You’ll also want to consider your investment style – do you want your investment decisions made for you by a professional, or do you want to make your own asset allocations? Once you determine which approach is right for you, you can make your investment selection. You can work with your HSA trustee to see which investment options are available, and work with your financial planner to select proper investments.

Lastly, withdrawals are tax-free if used for a generous list of qualifying medical expenses, including those not covered by health insurance, like dental and vision care. While using HSA savings for health care expenses offers the greatest tax advantage, dollars can be withdrawn for any purpose beginning at age 65 (income tax is owed on the distribution, similar to 401(k) or IRA distributions.) Unlike other traditional retirement accounts, however, there are no minimum required distributions at age 70 ½. Any withdrawals made for non-qualifying medical expenses before age 65 will be subject to income tax, plus a penalty of 20%.

There are a few stipulations dictating who can and cannot open an HSA. If you are over 65 and receive Medicare, you are not eligible to start or contribute to an HSA. Consumers also currently need to have a high deductible health plan to open an HSA, although this could change with future legislation.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation.