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Health Savings Account
September 2017

Sep 27, 2017 | Business Owners | Families | Retirees

A Health Savings Account (HSA) is one of the most flexible and friendly benefits in the entire tax code. To utilize a HSA, you must first have a high deductible health plan (HDHP). Many employers offer this option as does the individual health insurance exchange (ObamaCare plans). HSAs work best if you generally expect to have low-health care utilization over the next policy year, or if you are in a high tax bracket. If both apply to you, a HSA may be a perfect fit.

The power of the HSA lies in its double-edged tax benefit. You get a tax deduction when you put money into the HSA (up to $7,750 per year) and the money comes out tax free if you use the withdrawals for qualified medical expenses. These include co-pays, medical devices, eyeglasses, dental charges, and even long-term care insurance premiums. To supercharge your HSA, don’t take withdrawals for your out-of-pocket medical expenses each year. Pay those expenses with your other sources. Doing so will allow your HSA to grow over time. We have some clients with over $100,000 in their HSA account, obtained through annual deposits and investment growth, and an absence of withdrawals.

Why would you want to do this? Medical costs are often one of the largest retirement expenses. Fortifying your retirement savings strategy with a supercharged HSA puts you in a great position to deal with these expenses down the road.

Like most tax benefits, there is some downside. If you take money out of a HSA for something other than qualified medical expenses, you will face a 20% penalty and taxes on the growth. However, once you reach age 65, the penalty no longer applies and taxes are applied only on the growth. This feature essentially turns your HSA into an IRA at age 65 with enhanced tax benefits.

There are not many cases in the tax code where the IRS lets you have your cake and eat it to. This is one of them. Discuss the applicability of a HSA account with your financial planner or tax advisor.