Health Savings Accounts and Retirement #9
You’re listening to uncommon sense podcast by Bowman financial strategies. I’m your host Erik Bowman and thank you for joining me today.
This communication does not constitute federal tax advice and may not be used. As such. Please consult a qualified tax professional for tax advice or assistance. In addition, investment advisory services offered by Change Path LLC, a registered investment adviser, Change Path and Bowman financial strategies are unaffiliated entities.
Hi everyone. Welcome to Uncommon Sense Episode 2. Uncommon sense being the financial education series by Bowman Financial Strategies. My name is Erik Bowman, your host. Today we’re going to be discussing HSAs. What is an HSA? How has an HSA treated from a tax perspective? How do HSAs interrelate with Medicare and what are some strategies that retirees can utilize HSAs for?
Erik: 01:19 An HSA, for those of you who may not be familiar with the acronym, HSA stands for health savings account and it’s a specifically designed type of savings account where you can put away money on a tax preferred basis to use for qualified medical expenses. A few quick things to know about HSA is just so you don’t get confused and potentially open up the wrong kind of account and therefore wouldn’t have the tax benefits is it differs from an FSA or a flexible spending account. The biggest differences that an HSA, it rolls over year to year and you can accumulate those dollars each year up to the maximum contribution. In the year 2018 for an individual, the HSA maximum contribution limit was $3,450 and for a family HSA contribution limit in 2018 it was $6,900. For the tax year 2019, there’s been a slight increase of $50 to the self only HSA contribution limit, so it’s now $3,500 a family HSA contribution limit we are now at $7,000. one very important stipulation regarding HSAs is that you may only contribute to a health savings account if you have a qualified high deductible health insurance plan. This is very important to understand because if you have a traditional PPO or HMO plan, you cannot contribute to an HSA and enjoy any of those tax benefits. So just to dig in a little bit, and really review, what are the basics of HSA? Is there one of the most powerful tax deferred or tax beneficial plans out there because they’re actually tax beneficial in all three phases. That means that when you make a contribution into an HSA, that’s going to be tax deductible in that year of contribution. And as a side note, you may contribute to an HSA up until the filing deadline for that particular year. So for example, for the year 2018, you can contribute up to the maximum total amount for the household by the filing of April 15th, roughly of April, 2019.
In addition, when the dollars are put inside of an investment account, which they are allowed to be put inside investment accounts, um, those, that growth is going to be tax free. And then as long as you’re following the rules and using the dollars from the HSA for appropriate medical expenses, it will also be untaxable when you take the money out. So as you can see compared to an IRA or a 401k, what we have is that you get the additional benefit of not only having it be tax free on the way in, but during the entire growth phase. And on the way out, no other retirement plan actually allows for all three phases of those dollars to be tax free. Another interesting caveat for HSAs is that so long as you have had the appropriate type of high deductible health insurance plan, if you never did make your contributions like you could have, you could make current contributions in the current year into your HSA and you can reimburse yourself for previous year’s expenses. Just keep in mind those expenses had to have been incurred while you are under an HSA qualified health insurance plan.
So the bottom line is that what is available to you and is often under utilized for people who actually have one of these health savings accounts, is that the maximum contributions are not ever made. And this would be even in the face of paying health costs or healthcare costs that would exceed that contribution limits. So there’s money being left on the table, savings and tax benefits that are being left on the table. So what you can think about now is if you’ve contributed to your IRA and your 401k, and even if you have maximized those contributions, and if you’re in your early sixties and have an HSA eligible health insurance plan, it may make sense to contribute to the maximum allowable by law each year, build up a reservoir of tax free funds that were tax deductible in the year of contribution that you can then use it anytime, even after you’ve gone on Medicare.
One of the questions that I oftentimes get regarding HSAs relates to Medicare. The question often sounds something like this, which is, can I have an HSA or contribute to an HSA while I’m on Medicare? Because those tax advantages sound very beneficial. The quick answer is no. That once you file for Medicare, you are ineligible to contribute to an HSA anymore. That’s a pretty black and white statement by a Medicare and the IRS. However, if you have been contributing into an HSA and you have not utilize those dollars and there is a balance in there that has accumulated over the past couple of years, you may use those dollars with no penalties at any time. Even while you were on medicare, you simply can’t continue to make contributions into the HSA while you were on Medicare.
It’s really just another way to save for retirement. Although those dollars in order to enjoy the tax benefits and need to be dedicated to healthcare costs, certainly we know that as we enter into retirement and live along fun life and retirement, that there’s a good chance we are going to have healthcare expenses and it’s nice to have a reservoir of dollars available that are treated so special from the IRS from a tax perspective. And once again, you can’t make any new contributions into an HSA once you start Medicare, but you can use your saved up assets inside of your HSA account for qualified health care costs if you are on Medicare. Very important distinction there. And finally, a key takeaway points are number one, if you have an HSA and you’re capable, you should maximize those contributions even if you don’t think you’re going to spend that amount in the current year because those dollars will rollover and you can use those in future years for qualified health care expenses. Second, if you have Medicare, you are not allowed to make additional contributions into an HSA, but you may use the previously accrued balances for qualified health care expenses. I hope you found this podcast on
HSAs health savings account to be useful and I hope it answered some of the basic questions that you may have about it. Thank you for joining me for uncommon sense, the Bowman Financial Strategies financial education series. I’d love to hear your feedback on financial topics you would like to learn more about. Just drop me an email at Erik, that’s E R I K, at Bowman financial strategies dot com, or go to the Bowman financial strategies website and send me a note on our contact page. In addition, you can always search for topics of interest in my archive on our podcast page at www.bowmenfinancialstrategies.com/podcasts. Have a great day.
This communication does not constitute federal tax advice and may not be used as such. Please consult a qualified tax professional for tax advice or assistance. In addition, investment advisory services offered by Change Path, LLC, a registered investment adviser, Change Path and Bowman Financial Strategies are unaffiliated entities.