STWS Advisor Jennifer Meyer explores how HSAs can help you save smarter for retirement
We are often asked “what else can I be doing to prepare for my retirement?” While maximizing retirement (TSP) savings and securing your employer match are generally well understood concepts, a lesser known tool that may improve retirement outcomes is the Health Savings Account (HSA). We find a large percentage of employees have little to no knowledge of the HSA, and even if an employee has heard of it, it is often not fully understood and even less often taken advantage of.
Here are the Basics of HSA's:
1. It is an account that works like a savings or investment account specifically for medical expenses
2. Contributions are made pre-tax and withdrawals are tax free when used for qualified medical, dental, vision, or long term-care expenses. This is the only money you can say is potentially TRULY tax free!
3. Unused HSA funds are carried over, without limit, from year to year (unlike your Healthcare Flexible Spending account)
4. HSA’s MUST be used in conjunction with a High Deductible Health Plan (HDHP) and there can be no other health insurance coverage (i.e. Medicare, Tricare) in place
Pros/Cons of HSA’s:
Pro’s
1. Part of monthly FEHB premiums are deposited automatically into HSA
2. No income limits to participate
3. HSA is portable, meaning if you leave federal service- you keep your account
4. HSA funds are not use or lose- they can be carried over from one year to the next
5. Spouses inherit HSA accounts as though the account was his or her own- no taxes due
6. Withdrawals to pay for qualified medical expenses are taken income tax-free
7. Preventative services (as defined by IRS) are not subject to deductible requirements
Con’s
1. HDHP premiums are higher than “standard” insurance
2. Potential for out of pocket costs to be higher due to higher deductibles
3. Participants generally need to build up HSA values over time in order to gain the maximum benefit
4. Non-spouse beneficiaries who inherit the account are subject to taxes in the year it is inherited
5. With the exception of preventative care, the annual deductible must be met before plan benefits are used
6. If the funds are needed for non-medical expenses- they will be taxed as ordinary income-
but no penalty applies
In summary, the rules around Health Savings Accounts can be confusing which is likely the reason that so few people are using them. However, for those who are eligible, and are able to take advantage of HSA’s, the year over year ability to grow your contributions and withdraw them tax-free for qualified medical expenses later on – for example, once retired- makes them an excellent long term planning option.
As always, the team at Serving Those Who Serve are here to answer your questions. If you would like to explore your options for using a Health Savings Account, please contact us here.
**Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.**
HSAs 101: Health Savings Accounts