If you have a high deductible health insurance plan, there is a valuable tool that can save you tens of thousands in retirement. You may already be familiar with Health Savings Accounts (HSA). However, it’s likely that you are not maximizing its true potential.
Health Savings Accounts were first created in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act. The idea behind creating the Health Savings Account was to help combat the rising medical costs. Congress may have intended to help with medical costs in the short term, but Health Savings Accounts can have a far-reaching impact on an employee’s medical expenses in retirement.
A Health Savings Account is an account created for individuals or families with a high deductible health plan (HDHP). There are several qualifications that a health insurance policy must meet to qualify as an HDHP, but the main requirement is your deductible must be at least $1,400 on an individual plan or $2,800 on a family plan. If your health plan qualifies, you can contribute either $3,650 or $7,300 depending on if you have an individual or family health plan. If you enroll in an HSA eligible plan mid-year, your contribution limit must be prorated.
To utilize your HSA properly, you submit a claim on your account for qualified medical expenses. Qualified expenses include nearly any expense that counts against your deductible such as diagnostics, cures, mitigations, treatments, and prescribed preventative medication. However, the HSA cannot be used to pay your health insurance premiums or over-the-counter drugs. Alternatively, retirees can use the HSA for Medicare premiums parts B, D, and Medicare Advantage Plans – but not Medicare Supplemental Plans. When utilized correctly, the funds are distributed to you completely tax-free.
HSAs offer incredible tax advantages that it offers. Health Savings Accounts are considered triple tax-advantaged. How can that be possible? Well, the contributions to your HSA are tax-deductible, earnings grow tax-free, and lastly, all distributions are tax-free if used properly. There is no other savings tool that offers the same triple tax benefit as the Health Savings Account. An HSA possesses the best attributes of both a Traditional IRA and a Roth IRA.
Now to truly maximize the value of your Health Savings Account, we need to view it differently than an account that we fund and wipe out every year for medical expenses. By taking the steps necessary to maximize your Health Savings account, you can enjoy the benefits throughout your working years and well into your retirement years.
First, you want to maximize your yearly contributions. By doing this, you are taking full advantage of the tax deduction during your working year. Then invest those contributions similarly to your 401(K) or other retirement accounts. This helps boost the growth potential of earnings in your account. Finally, you want to wait until you start Medicare to start using your Health Savings Account funds. They can cover your Medicare Premiums Part B and D, Medicare Advantage Plan, and any qualified medical expenses. By waiting until you are in retirement, you’ve allowed the account to have substantial growth and you are utilizing tax-free funds. Following these steps has the potential to save you thousands in taxes over the years.
Now I always do better when we are using real numbers. As an example, let’s say instead of contributing $50,000 into your 401(k) plan over the course of your career, you contribute those funds to your Health Savings Account. Then you decide to invest those funds over the course of 25 years. If the funds earned an average rate of return of 6%, that $50,000 will have grown to approximately $214,593 after 25 years. If that $214,593 was in your pre-tax 401(k), you would pay taxes of around $32,189 to $42,918 on the sum of your withdrawals depending on if your effective tax rate was 15% or 20%. Meanwhile, you will owe $0 in taxes as you start taking distributions for qualified expenses from the HSA that you started 25 years ago with $50,000 in contributions.
As you can see, investing your Health Savings Account contributions and cash-flowing current medical expenses now could end up being the difference of tens of thousands of tax dollars in retirement. Even if it means contributing just enough to your 401(k) plan to receive the full company match, then putting any other contributions to your Health Savings Account, it might just be worth it.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at justin.lueger@invisorgroup.com.
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