Health Savings Accounts
17 Mar 2017
There are multiple benefits to putting away funds into a Health Savings account. If structured and utilized properly, these accounts can be an important part of a total financial planning strategy. There are some rules and regulations to be aware of when evaluating the merits of utilizing Health Savings Accounts as a part of a comprehensive financial plan. Depending on individual circumstances, the health insurance plans they are attached to may or may not be the most beneficial for your situation.
Evaluating Opening a Health Savings Account
Health Savings accounts are only available if used in conjunction with a High Deductible Health Plan (HDHP). The IRS outlines exactly what constitutes a High Deductible Health Plan. Basically these are health plans that have a higher deductible than a “traditional” insurance plan. They also have a high out of pocket maximums, which range from $6,550 for an individual, up to $13,100 for a covered family. There are also preventative care benefits which may or may not be included. Depending on health, a HDHP may or may be the most advantageous. For example, if you have an underlying health condition, it may not make sense to select a plan with a higher deductible. If you typically don’t utilize your insurance other than for periodic and regular care, the lower premium cost may be worth it.
Advantages of a Health Savings Account
Health Savings accounts are sometimes referred to as having triple tax benefits. This is because funds placed into the accounts are tax deductible. Contributions will then grow tax free. Earnings and contributions can then be taken from the account tax free if used on qualified medical expenses. One of the other advantages is that the funds are portable, meaning they can be rolled over year to year or moved if you change your job.
Funds placed into an HSA are tax deductible at the highest marginal tax bracket for all savers. Unlike a Traditional IRA or a Roth IRA, there are no phase out limits. This means that high income earners are able to take advantage of the tax deduction. This is also a non-Schedule A deduction, meaning that even individuals who take the standard deduction can benefit. Depending on your tax bracket, this could be a substantial advantage.
The funds are held through a custodial account similar to that of a retirement account. This means that a bank, insurance company, or qualified trustee can open the account and hold the funds for you. Depending on their capabilities, they may be able to invest any excess fund in instruments other than cash.
Think about this for a moment. What all of this really means is that there is the potential to get a tax deduction on funds, and then be able to withdraw them tax free. Depending on where the funds are held, they can be invested in instruments with higher growth potential. From a planning standpoint, this can be incredibly powerful in meeting future financial goals.
Ah, the catch. As with most things in life, there is of course a catch. First off, you are unable to open an HSA if you are covered by any other kind of health insurance. For those who are 65 and older, this includes Medicare. There are also limitation on the amounts that can be contributed for each year. Individuals can make contributions up to $3,400. Families can make contributions up to $6,750. Also, distributions before the age of 65 on expenses that are not qualified medical expenses are subject to income taxes along with a potential 20% tax penalty. One of the other concerns is that funds are earmarked for medical expenses until the age of 65. At this point, the funds can be withdrawn for another income stream, though you will pay income tax on the proceeds.
There are many considerations to take when evaluating a Health Savings Account. There is the potential to be some huge advantages. However, as always, there are also potential drawbacks that need to be evaluated as well. This is where having a comprehensive financial plan comes into play. It allows you the opportunity to evaluate decisions and select the one that puts you into the most beneficial financial situation going forward.
Today is the day, make it count!