This article was published in the New Haven Register November 25, 2017.
Health savings accounts, or HSAs, offer a tax-advantaged way to pay for current medical expenses, and they also offer a way to save for future medical expenses, including post-retirement costs.
If you have hesitated to open an HSA because you are skeptical about the savings aspect, you should know about a new study by the Employee Benefit Research Institute that shows more than 90 percent of HSA owners rolled over money at the end of 2016.
The report, “Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2016,” also reveals that two out of three HSAs had more money put in than taken out. In other words, individual and employee contributions to the accounts during 2016 were higher than total distributions for medical expenses in 66 percent of accounts.
In some cases this means account holders overestimated their medical expenses at the beginning of the year, but in other cases people contributed more than they needed in an effort to build the accounts over time. That highlights an important use for HSAs in retirement planning, as savings accounts for medical expenses.
Here’s how an HSA works: Created in 2003 by a Medicare act, HSAs allow people with high-deductible health care insurance plans (who are not on Medicare) to pay for current health-care expenses and save for future expenses with a tax-advantaged account. High-deductible plans carry a high annual deductible with lower monthly premiums, and the IRS defines the minimum deductible amounts and maximum out-of-pocket expenses each year for an insurance plan to qualify as HSA-eligible.
One of the biggest advantages is the ability roll over the funds from year to year, allowing the unused portion to grow over time, and a financial planner can help you incorporate HSAs into your overall financial plan. Here are some other advantages:
Multiple contributors. You can put money into the account and so can your employer, your relatives or anyone else.
Pre-tax contributions. If you contribute through payroll deposits, the money is not subject to federal income taxes, and most states, including Connecticut, do not impose state taxes.
Tax-deductible contributions. Any contributions made with after-tax dollars can be deducted, and employer contributions are not included in your gross income.
Tax-free withdrawals. As long as you use money withdrawn from an HSA for qualified medical expenses, the withdrawals are not subject to taxes.
Tax-free earnings. If you invest some or all of the HSA funds, interest and other earnings are not taxable.
Portability. You can carry your HSA to a new job or a new insurance plan.
Note that the amount of money you can contribute each year is limited, just like with a 401(k) plan. For 2018, the limit (employee plus employer) is $3,450 for an individual and $6,900 for a family. Those over age 55 may add a $1,000 catch-up contribution.