An apple a day may keep the doctor away, but sadly, it will not keep future medical expenses at bay.
For those enrolled in high deductible health plans, an ideal way to accrue funds for future medical expenses is through a health savings account.
Those who put away funds in an HSA are not required to “use or lose” the dollars they contribute to the account, so young and old alike can amass tax-advantaged savings over time – and can even use those savings in their distant retirement future without penalty.
Since HSAs are investment accounts that benefit from an investment pool rather than the simple interest offered in other savings vehicles, investors would be wise to explore this type of health care savings with their financial adviser.
For those with the ability to pay for upfront medical expenses through a high deductible plan, the tax advantages of HSAs are many:
If the contribution is made as a payroll deduction, no taxes are paid on the contribution.
Contributions to an HSA by an employer are excluded from one’s gross income.
Investment earnings in an HSA are not taxed.
Qualified health expense withdrawals from an HSA are tax-free.
In addition, HSAs are “portable” – meaning that investors are able to keep the account even as they change employers or leave the workforce.
ACCUMULATION AND GROWTH
A noteworthy strategy for covering deductible expenses while maintaining future health care savings is to use cash reserves for deductible spending, leaving more funds in an HSA for higher growth potential.
Since contributions to an HSA are pre-tax, it can be prudent to tap personal cash reserves before using HSA funds – so as to let more pre-tax dollars compound.
Funds accumulated in an HSA when a contributor is young and healthy may provide funding for increased health care costs as one ages, including long-term care.
HSA funds can even be used to pay certain eligible health care insurance premiums under existing Internal Revenue Service rules.
You may be wondering how HSAs differ from another health care savings vehicle, flexible savings arrangements (commonly known as flexible savings accounts).
From a long-term health care savings perspective, the FSA is inferior to the HSA. Those contributing to FSAs must “use or lose” their annual contributions and cannot carry their savings into retirement.
Employers offering FSAs have the option of providing one of the following short-term options to employees, but are not required to do so:
An employee can carry over $500 of the funds from one year to another; otherwise, the unused funds go back to the employer.
Or an employee has a grace period into the next year – having to spend funds by March 15.
So, FSAs are not so flexible, after all.
MORE PRE-TAX CONTRIBUTIONS
In addition, pre-tax contribution limits for FSAs are lower than those of HSAs.
In 2017, the individual contribution limit for an FSA is $2,600. The maximum HSA contribution for an individual, on the other hand, is $3,400, and the maximum contribution for a family is $6,750.
Those 55 and older can contribute an additional $1,000 to their HSA, with a total family limit of $8,750.
POTENTIAL EXPANSION OF BENEFITS
In his recent speech to a joint session of Congress, President Trump spoke about the possibility of increasing the annual HSA contribution limits, as well as expanding qualified expenses.
Democrats rebutted that average folks do not have enough extra income to benefit from increased contribution limits. Your financial adviser can keep you updated on developments that affect HSA savings.
But no matter the political climate, the tax advantages, high contribution limits and long-term savings benefits of HSAs are undeniable.
Augmenting future health care savings by contributing to an HSA is just what the doctor ordered.
Marilee Falco is a principal and financial strategist at JoycePayne Partners of Bethlehem and Richmond, Va., responsible for client financial strategy and counsel, comprehensive financial planning and investment management. A Certified Financial Planner and chartered financial consultant, she can be reached at email@example.com.