MoneyDo: Consider Switching To A Health Savings Account (HSA)-Compliant Health Insurance Plan
In the immortal words of Benjamin Franklin: “In this world, nothing can be said to be certain, except death and taxes”. At Annex Wealth Management, we understand Franklin’s point – however, we’d contend health care expenses in retirement are just as certain as “death and taxes”.
When preparing for retirement, it’s important to plan for healthcare expenses and leverage available tools to make saving for healthcare more efficient. You may have believed that health savings accounts are a strategy only for younger people, but people of all ages have discovered the benefits of this tool.
This week’s MoneyDo task: Evaluate the health insurance plans available to you and consider switching to a health savings account (HSA)-compliant health insurance plan.
Consider The Advantages
HSAs are very powerful savings tools, often labeled as “triple tax advantaged,” meaning:
- Contributions are pre-tax, meaning the contribution is deductible on the current year tax return
- Contributions grow tax-free
- Withdrawals are tax-free, if used for HSA-approved medical expenses
The advantages of Health Savings Accounts extend beyond its “triple tax advantage.” The tax code doesn’t require earned income, nor does it impose income limits to contribute, like other tax advantaged savings accounts. Essentially, everyone with a qualified health insurance plan can contribute.
HSAs do have annual contribution limits: for 2020, an Individual can contribute $3,550, while a family can contribute $7,100. For those over the age of 55, an additional $1,000 “catch up” contribution is allowed.
Review Compliant Plans
As you begin evaluating your health insurance plans, you might be wondering what criteria make a plan HSA-compliant. For 2020:
- The deductible must be at least $1,350 for an individual or $2,700 for a family
- Yearly out-of-pocket maximum expenses can’t exceed $6,900 for an individual or $13,800 for a family
- Generally, a health plan (including a Marketplace plan) that only covers preventive services before the deductible.
Keep in mind – Medicare is NOT an HSA-compatible plan, and special rules apply to the year in which you transition to Medicare. If you have questions on HSAs and Medicare, we’d be happy to help.
As you evaluate, consider what expenses you’ll encounter, and if those expenses would be approved HSA expenses. Generally, if the expense is considered deductible on your current year return, then it is also an approved medical expense for HSA purposes. Some examples are listed below and more information can be found in the IRS publication 502. (https://www.irs.gov/pub/irs-pdf/p502.pdf )
- Covid-19 Testing and treatment
- Eye exams, glasses, contacts and eye surgery
- Dental work
- Doctor visits
- Feminine hygiene products
- Fertility procedures
- Hospital services
- Insulin and Supplies
- Mental health
- Medicare Part A, B, C, or D premiums
- Nursing home
- Over-the-counter medications and supplies
- Prescription medication
- Physical therapy
- Service animals
- Stop smoking programs
HSAs Work Best When You Let Them Grow
As you plan and evaluate, keep in mind that an HSA is a very powerful savings tool and tax-free growth is one of the reasons they’re so attractive. The key word there is “growth.” Growth takes time.
A common mistake in planning around an HSA occurs when people contribute and then take withdrawals to pay for the current year’s medical expenses (treating the HSA like a flexible spending account). The flexible spending account concept isn’t optimal because the account doesn’t have the opportunity to grow.
Instead, consider paying for medical expenses from a non-HSA account, leaving the HSA to grow tax-free until retirement.
Review Non-Medical Withdrawal Requirements
Even if your HSA grows beyond your healthcare liabilities in retirement, you can always withdraw for non-medical related expenses at age 65. The caveat is that you’d have to pay income tax on the withdrawal. Non-healthcare withdrawals would be treated similarly to IRA distributions after the age of 65.
Consider How Your Estate Should Deal With Your HSA
One point of consideration for your evaluation – while it is a good course to allow your HSA to grow until retirement, it isn’t a good idea to leave this type of account to your heirs. A spouse will be able to continue the tax advantages associated with the HSA that you enjoyed during your lifetime. However, a non-spouse individual is unable to “rollover” the funds and will be required to immediately recognize the ordinary income. Unlike IRA distributions, there is no 10-year rule.
This week’s MoneyDo is longer than most – but that’s because there’s so much to learn about this powerful financial planning tool. Our planning team at Annex Wealth Management incorporates HSAs into financial plans whenever possible. As you evaluate your situation and if an HSA is right for you, make sure to bring questions to an advisor you can trust.