The Healthcare Tax Break You May Be Missing

Healthcare planning and retirement planning are as inseparable as catfish and whiskers. Get this, an average 65-year old man will need $131,000 in retirement to cover just premiums and prescriptions – the average woman, $147,000. These are expenses that could blow up one’s retirement plan. Learn here how a Health Savings Account may be just the solution while offering generous tax advantages.

Health Savings Accounts (HSAs) are extremely flexible as they offer triple tax advantages: 1) Contributions are tax-deductible or taken out pre-tax of your paycheck; 2) They grow tax-free; 3) Withdrawals for qualified medical expenses are also tax-free. So, they are like a traditional IRA and a Roth IRA combined in one investment account. Plus, after age 65 you can take withdrawals for non-health expenses if you just pay normal income tax on the amount. As a result, there’s no risk in saving more than you’ll need for healthcare and having it go to waste.

Do you qualify?

People who obtain health insurance through a High Deductible plan qualify for an HSA. For singles, a plan with a minimum deductible of $1,350 and a maximum total annual out-of-pocket expense of $6,650 qualifies. For families, the deductible minimum is $2,700 and the max out-of-pocket expense is $13,300. If your health insurance plan meets that criteria, you may establish and contribute to an HSA. If you change employers or health plans to a non-high deductible plan, you can still use your HSA, you just can’t contribute to it at that point.

Those who have very good health insurance options through their employers, like the University of Kentucky, won’t have access to an HSA. Self-employed individuals, small business owners, members of law firms or contract lobbying firms and non-profit associations, however, often use High Deductible plans because the premiums are more reasonable than their other health insurance options. Those individuals should consider establishing an HSA.

Contributing to an HSA

In 2018 the contribution limit for individuals is $3,450 and $6,850 for families. And, unlike a Flexible Savings Account, you don’t have to spend what you contribute each year. In fact, an HSA is really an investment account for health care – you contribute a certain amount each year, invest it appropriately for when you expect to need the money for qualified health expenses and watch it grow – tax free – until you need it. For instance, if 45-year old Monica contributes $298 per month, or $3,585 a year, to an HSA until she turns 65, earns an average of 7% per year on her investments, she will have accumulated that $147,000 the average woman will need for healthcare premiums and prescriptions in her retirement. That’s just an example, any amount will help toward future expenses.

Should you establish an HSA?

First, before establishing an HSA, investigate the options the plan offers for investments. Does it offer the opportunity to invest in a variety of stock and bond mutual funds? If so, great, proceed saving. If the plan simply parks your hard-earned dollars in a money market account earning .1%, it’s then just a good opportunity to save for a large medical expense you expect to incur in the next 2-3 years. It is not, however, a good option for saving for medical expenses in retirement.

Second, while extremely flexible, an HSA should be viewed only as a supplement to your 401(k) and your traditional IRA and Roth, especially if your employer matches your contributions to their sponsored retirement plan. After those, an HSA is an excellent way to save and invest for what we must assume will be pricey healthcare expenses later in life. Even if you don’t save the amount Monica is, having a fund with “extra” healthcare dollars in it can really pay off when you need it.


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