We love Health Savings Accounts, (HSAs) and we think you should too. Like Francois Giguere, CFP®, says: “There are three big reasons I love HSA plans:
- They grow tax-free.
- You can keep them over for the rest of your life.
- You can invest the money.”
Let’s look at each of these points more closely. First, an HSA is one of the few ways that you can deposit pre-tax monies; you can invest, grow and pull out HSA money without being taxed. The contributions are not huge, but they might add up over time! In 2019, the contribution limits are:
- Individual contribution limit: $3,500
- Family contribution limit: $7,000
The second, and often misunderstood, rule about HSA plans is that you can keep them forever. Unlike Flexible Spending Account (FSA) plans, which are “use it or lose it” in the year you receive the FSA, and HSA has no time limit. You can leave the money in there for the duration of your lives. Which leads to the third point...
Third, you may invest the money in an HSA. Many HSA custodians ask you to keep approximately one year’s worth of HSA contributions in cash, especially initially, but then offer investment options for the rest of the money. You could earn returns on the money that you’ve never paid taxes on. Then, you can pull out the money for health-related expenses, completely tax-free.
Here are three ways to take advantage of the HSA:
- Maximize your contributions. If you’ve the resources, then put as much as you can into your HSA plan as often and as early as possible. Then, invest it.
- Don’t spend down the HSA. If you can afford to pay for health costs outside of the HSA, consider doing so. This way, you can continue the tax-free growth for as long as possible. It’s difficult to get money into a tax-free bucket, keep (don’t use or lose) your HSA!
- Leave it to your spouse. She or he can inherit your HSA plan and roll it into his/her own. Near the end of your life, whenever possible, you’ll want to pay for medical expenses. You may “reimburse yourself for qualified medical expenses you paid out of pocket in previous years as long as those expenses occurred after you established the HSA and you have proof of those expenses.” Source: Why Your Kids Don't Want Your HSA
If any of these reasons resonate with you, and you’d like to learn the details, contact your wealth manager!
Important caveats about HSA plans:
If your kids inherit your HSA, they will be taxed on it. They are not able to roll your HSA into their own. So, if a tax-free estate is important to you, talk with your wealth manager about how to plan for, offset and/or eliminate your kid’s potential tax burden.
Not all Affordable Care Act health insurance plans meet the HSA requirements. To qualify to contribute to an HSA, you must have a health insurance policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage in 2019. These are called “high deductible plans.” And there are other rules, so make sure to ask your insurance company if your health insurance allows you to contribute to an HSA.
Also, you cannot contribute to an HSA if you’re on Medicare. The year you turn 65 (and start Medicare), is the last year you may contribute, and the IRS has specific rules about how to handle that year’s contribution you’ll want to follow.
ASK A PROFESSIONAL. If you’ve any questions about whether an HSA plan is right for you, your family or your friends, reach out to your wealth manager at AIFS. We’re here to be of service!