There aren’t many free lunches in healthcare, tax planning or investing. The Health Savings Account (HSA) comes pretty close. Designed to help you save and pay for medical expenses, HSAs are an example of a major investment and tax benefit hiding in plain sight. Less than 15 percent of those eligible use them. Do you?
Established in 2003 by President Bush, HSAs are leading the way in consumer-driven healthcare. These plans allow you to put money away tax-free to be used for medical expenses at your discretion.
HSA adoption has been steady but slow, with approximately $42 billion in HSAs in 2017. Anecdotal research suggests about five of six eligible adults have not opened HSA accounts.
Here’s how they work:
- HSA contributions are tax-deductible, and there’s no tax on distributions used for qualifying medical expenses
- Funds roll over and accumulate every year, acting as an effective long-term investment vehicle
- They are owned by you, not by your employer
- You can open one individually, or through your employer (Max and I did them individually because it is so simple)
- They give you choice – you choose the treatment and the reimbursement without a gatekeeper
Furthermore, you don’t need to spend the money on healthcare. You can let your account grow tax-free to age 65, after which you can spend it on anything without penalty. Consult your investment advisor for best choices. If you have tax questions, call your accountant.
Anyone can have an HSA. Call or email us if you would like to find out how we did it.
The IRS rules
Health accounts were created inside the tax code. The Internal Revenue Service determines what can be reimbursed and what cannot. Examples of eligible expenses are acupuncture, diagnostic tests, dental treatment and physical therapy. Non-qualified expenses include plastic surgery and health club dues. See IRS publication 502 for the complete list.
Like other private retirement accounts, there are limits on how much you can contribute each year. The 2018 contribution limits are $3450 for individuals $6900 for families. Contribution limits have been going up 3 percent every year. After age 55 you can add an extra $1000 per year.
HSA more, worry less
Your HSA contributions add up. By contributing every year, you can save $60k in taxes over 20 years. At the same time, even with a modest 5 percent return, you can build your HSA account to $250k. (With many options for investing your HSA, you may even do better than 5 percent.)
Health care expenses are one of the biggest financial worries in retirement. HSAs increase the amount of dollars available for medical purposes, before and after retirement. Think about it…what would it be like to have an extra $250k to spend on your health where and when you want to?
You may enjoy reading this article on Max’s 7 C’s because it also discusses money strategy.
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