Bear Mountain Capital Inc.

Benefits of a Health Savings Account?

| September 22, 2015

Planning Perspectives

Health Savings Accounts


(This post has been updated with additional information from our friends at Accountability Services.)

When we sit down with clients to review their long-term objectives, often we discuss the basics such as retirement and college savings. These topics are heavily covered and the savings vehicles available to help meet these needs are well known. However, another top planning priority tends to be long-term health care.

Most of the people we talk with are aware of and invest in retirement accounts: IRA’s, 401(k)’s, 403(b)’s, etc.  Many people are also well educated on the merits of 529 college savings plans. But, an often overlooked savings vehicle with similar benefits is the health savings account or HSA.

All of the aforementioned accounts have one key characteristic: tax-deferred or tax-free benefits as it applies to the investment gains and income of monies deposited into the account. Despite the lack of awareness, health savings accounts have been around for many years. They allow individuals to save future medical costs by providing the opportunity to save and invest money on a tax-free basis, much like they would for retirement.

In fact, an HSA account can provide a great boost to retirement by giving you several tax benefits when planning for future medical expenses. The 4 primary tax benefits these accounts provide include:
1. Your contributions to an HSA are tax-deductible (pre-tax).
2. All earnings and interest grow tax-free.
3. Any distribution used for qualified medical expenses are tax-free.
4. Any distribution after the age of 65, whether medical or non-medical, are taxed at your current tax rate (just like a traditional IRA).

What is the catch? Well, there is a catch. There is always a catch. To qualify for an HSA you must meet all of the following criteria:
* You must be enrolled in a high-deductible health plan (HDHP) that does not cover all medical expenses.  A HDHP for calendar year 2015 is a plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage.
* You cannot be covered under another health insurance plan, including Medicare, some exceptions apply.
* You cannot be claimed as a dependent on another persons tax return.

If you qualify for an HSA either through your employer or individually there are a few other benefits:
* Like an IRA, you can roll your HSA account to another HSA custodian.
* There are no required minimum distribution rules (as there are with IRA’s) near retirement, allowing your money to grow longer on a tax-free or tax-deferred basis.
* Your contributions are not limited by your income. In other words, it doesn’t matter how much you make. If you qualify, you can contribute to an HSA account.
* Even more, you do NOT need to have W-2 earnings or self-employed earnings to make a deductible contribution.
* Although as an individual you own and control your HSA, your employer can make tax exempt contributions.
* You can rollover MSA, IRA and ROTH amounts to your HSA.

So, how much can you contribute? Currently contributions are capped at $3,350 per individual or $6,650 as a family.  If you are over the age of 55, you are eligible to contribute an additional $1,000 per year.

An HSA account is another vehicle to help you plan for your future. It can provide great benefits for covering future medical costs, but has the added value of being available for retirement expenses once you’ve reached the age of 65. If you haven’t considered it as an option, you may want to take another look.