4 secrets and techniques to optimizing your well being account
David Gardner For the camera
Health savings accounts, commonly known as HSAs, have become an important part of the financial image of many families. These accounts are for those who are on high deductible health insurance, also known as HSA Eligible Plans. In return for accepting higher deductibles, owners can add up to $ 3,600 to their account through 2021 and up to double that amount for families. Individuals who are 55 years or older can add an additional $ 1,000 to the plan.
What’s the big deal with HSAs? They are one of the few accounts that have a triple tax benefit. The benefits are so compelling that in most cases you should prioritize the contribution to your HSA over almost any other savings, with the exception of emergency funds and retirement plan contributions, which receive an employer match.
The first benefit is that with HSA deposits you get an upfront tax deduction. If it came from your employer or is deducted from your salary, the money that goes into your HSA is not subject to federal, state, or wage taxes. Second, HSAs can grow tax-free and have investment options that seem to be improving every year, including low-cost mutual funds. Third, you can withdraw money from HSAs tax-free as long as they reimburse you with qualified healthcare expenses. In addition to these HSA basics, here are other good tactics to keep in mind when using these accounts.
You can choose your custodian. Many workers do not realize they have a choice when it comes to HSA businesses. To be clear, you still want to open an account with your employer’s chosen provider. This way you can benefit from employer contributions and save income tax on your deposits.
However, once your HSA balance becomes significant, it may be a good time to consider other options. Fidelity has rolled out a true toll-free HSA with no minimum balance in the past few years. The investment fees for their mutual funds range from an average to a low of 0.015% per year for the Fidelity 500 Fund. If you want to use Fidelity, you can transfer your money directly to a Fidelity HSA from your existing HSA with another custodian.
It may be better to let your HSA grow. Most HSA owners use their balance to pay for qualified medical expenses as they arise. There’s nothing wrong with that. You still get the wage and income tax savings. If the amount in your HSA exceeds your out-of-pocket expenses in the event of illness or injury, it is even better to invest your HSA in a low-cost, long-term portfolio. I generally recommend that people pay for their medical expenses directly and grow their HSA by withholding distributions. This gives your account time to grow tax-free to cover future medical expenses.
Flexibility with HSAs increases at the age of 65. Typically, unqualified distributions from HSAs are subject to a 20% penalty and income tax. But once you turn 65, HSA accounts go through a magical transition. If you withdraw from your HSA for non-medical reasons, the funds are only subject to normal income tax like an IRA. So don’t be afraid of overfunding your HSA as you can use the funds at traditional retirement age for whatever reason if you’re lucky enough to have no significant medical expenses.
Medicare premiums and past expenses count. A little known fact is that you can make HSA distributions to cover your Medicare premiums. Another unusual strategy is that you can withdraw money from your HSA to cover qualifying healthcare expenses from previous years, provided you had an HSA at the time of coverage. In other words, ten years after retirement, it is possible to withdraw from your HSA for any expenses you have incurred since you opened your account. Why would you wait This way, your HSA funds can grow tax-free for longer.
David Gardner is a certified financial planner with Mercer Advisors and practices in Boulder County. The opinions expressed by the author are his own and are not intended as specific financial, accounting, or tax advice. They reflect the author’s judgment at the time of publication and are subject to change.