This Retirement Savings Vehicle Just Might Be Superior To The 401
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You know a health savings account helps pay for out-of-pocket medical costs, but it may surprise you to learn that this tax-advantaged account could be a superior retirement savings vehicle, too. Here is a look at what these accounts are, who can open one, and how to make the best use of an HSA for your retirement if you are fortunate enough to have one.
What Else Should I Know
As a result of this transition, RHS plan paper statements will also be discontinued, and statements will now be transmitted electronically. Participants will continue to pay a $25 annual account administration fee, which will be charged quarterly, and an annual asset fee of 0.40% will be charged to each participants account on a monthly basis based on the average balance for the previous month.
ICMA-RC will provide all eligible participants with a Fund Line-up Change Notice advising of exactly what is changing and how specific assets will be mapped from one fund to another. Other than the funds available for investment, no functionality will change due to the fund line-up changes. No action is required by you.
Why Should You Have An Hsa
Health care is one of the biggest expenses youll have in retirement. So, putting money aside is very important. A few other reasons are:
- You can invest & potentially grow your money:HSAs have investment options, too. This is a great way to potentially help pay for your health care costs in retirement if you can afford to not use the money now. Invest and give your funds the opportunity to build until youre ready to retire.
- You get triple tax benefits:
- Lower income taxes potentially: Money going into your HSA comes out of your paycheck. So, your taxable income goes down, which means you could pay less in income taxes.
- Tax-free investment growth: You dont pay taxes on your earnings.
- Tax-free withdrawals: You dont pay taxes on your money as long as you spend it on qualifying health care costs.*
*HSAs are not taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states, but not all, recognize HSA funds as tax-free. Please consult a tax advisor regarding your states specific rules.
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How Does It Work
You can contribute to your HSA via payroll deduction or by online transfer from your personal bank account to your HSA. Your employer or third parties, such as a spouse or parent, may contribute to your account as well.
You can pay for eligible medical expenses with your payment card or pay out of pocket. If you pay out of pocket, you can either choose to reimburse yourself or keep the funds in your HSA to grow your savings.
- Manage your HSA Account 24/7 via the Optum Financial mobile app or Optum Financial online account.
1Employees that terminate employment but keep HSA open and active with Optum will pay a monthly administrative service fee. Retirees enrolled in IYC HDHP/HSA benefit option are not required to pay the monthly administrative fee.
Deductible Medical Expenses Above The Agi Limits And An Hsa Contribution
For those whose medical expenses actually will be deductible perhaps because income is low and the threshold can be reached, or because there are other medical expenses that together will add up to exceed the 10%-of-AGI threshold, the situation is different.
Continuing the prior example, now the individual contributes $3,000 to a health savings account, and only needs $3,000 of pre-tax income to cover actual medical expenses , and thus has $4,000 of pre-tax income left over, yielding $3,000 as a Roth IRA contribution after 25% is held aside for taxes. The end result in this case, theres $3,000 in the HSA and also $3,000 in a Roth IRA.
In other words, to the extent that medical expenses actually will be deductible anyway, the tax savings on medical expenses frees up additional dollars to contribute to the Roth IRA. In essence, its a double tax deduction opportunity for the medical expenses now, and for the HSA to fund medical expenses in the future, and the HSA grows tax-free in the meantime.
Again, this assumes the individual has enough free cash flow in order to fund all of these simultaneously the HSA, the medical expenses out of pocket, and the Roth IRA. Nonetheless, to the extent there are dollars for all three, whenever the medical expenses are at least partially deductible, more dollars can be placed into tax-preferenced accounts.
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How Should I Manage My Receipts And Records
The balance in your health savings account is yours and rolls over every year. It is important to treat the record keeping of your HSA as you would your retirement plan, any other savings account or a credit card.
Here are some record keeping tips:
Make sure you review all of your account transactions.
If you see charges you don’t understand or that don’t belong to you, contact the provider or HealthEquity right away.
Keep records that allow you to reconstruct how you have spent your money.
Disputes or questions about billing and payments can arise even a year or two after a procedure or office visit.
Stay prepared for an IRS audit by saving HSA receipts for up to 7 years.
You’ll also want to maintain records of any deductions claimed on your tax return.
Are The Children Of Divorced Or Separatedparentseligible Dependents
In most cases, a child of divorced or separated parents, or parents who live apart, will be a qualifying child of one of the parents.
See the IRS publicationChildren of divorced or separated parents or parents who live apart under Qualifying Child, for more information.
However, if the child does not meet the requirements to be a qualifying child of either parent, the child may be a qualifying relative of one of the non-custodial parents. In that case, the following rules must be used in applying the support test.
A child will be treated as being the qualifying relative of their non-custodial parent if all four of the following statements are true:
1. The parents:
Are divorced or legally separated under a decree of divorce or separate maintenance
Are separated under a written separation agreement, or
Lived apart at all times during the last six months of the year, whether or not they are or were married
2. The child received over half of their support for the year from the parents .
3. The child is in the custody of one or both parents for more than half of the year.
4. Either of the following statements is true.
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Why Use An Hsa For Retirement
According to a Wall Street Journal interview with Michael Kitces, the former director of financial planning at Pinnacle Advisory Group Inc. in Columbia, Md, HSAs are “the most tax-preferred account available.” He also advised, “Using one to save for retirement medical expenses is a better strategy than using retirement accounts.”
Health Savings Accounts Are The Best Deal Out There For Anyone Saving Not Just For Health Expenses But For Retirement Too Heres How To Make Their Tax Advantages Work For You Now And In The Future
Saving money is often mentioned as one of the core steps toward financial success. Also important is deciding where to save money, as there are numerous options to consider. 401s, IRAs, Roth IRAs, nonqualified accounts and others all have their own rules, benefits and tax implications. Among all of these, though, there is one account that may be the most valuable and, at the same time, the most overlooked: the health savings account .
An HSA is a tax-advantaged way to save money to pay for qualified medical expenses. It is available for people who are covered by a high-deductible health insurance plan and, similar to 401s and IRAs, HSAs do have contribution limits set each year. While many high-income earners may find themselves ineligible for a Roth contribution or IRA deduction, HSAs have no income limits on who can contribute.
Since it is only available to those with high-deductible health plans, you must first make sure that type of health insurance best fits your situation. Ideally, high-deductible plans are for those with low health care needs, and since your health may one day dictate that a high-deductible plan is not in your best interest, it is all the more important to take full advantage of an HSA while you can.
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Potential Financial Benefits From Your Employer
An HSA can also lead to some nice on-the-job perks.
“Employers are continuing to add HSA plans and wellness incentives,” says Fronstin. In some cases, employers are tying the two benefits together, he says.
For example, assume you get your biometrics checked. With that screening, you might get an assessment of your BMI , or you might have your blood pressure or cholesterol examined. In exchange for the employee taking those healthy steps, which can often prevent further medical problems down the road, “your employer may increase its contribution to an HSA or lower your health care premiums,” Fronstin says.
Should You Use Your Hsa To Save For Retirement
If the rest of your financial house is in order, meaning youâve got a sufficient emergency fund and are contributing at least enough to get any employer match to your 401 or 403, âit may make sense to put some retirement dollars into an HSA,â says Mitchell. âGenerally, we like to see at least 15% of someoneâs gross salary saved for retirement, and an HSA may be a great option for a part of this.â
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What Can You Use Your Health Savings Account For
The classic view of an HSA is that its an account to hold the money that someone sets aside to cover the deductible for their health insurance. Funds are contributed to the account on a pre-tax basis, and to the extent theyre subsequently used to cover the unreimbursed expenses associated with the health plans deductible, the end result is that health expenses are paid on a pre-tax basis . This is often a better tax treatment than paying health care expenses directly from a checking account, where payments are just “normal” medical expenses with a deduction limited to 10% of Adjusted Gross Income for those under age 65… which means most or all medical expenses paid out of pocket dont actually produce a tax benefit.
In addition, to the extent that not all the funds for the HSA are actually used on medical expenses for the current year for instance, the account owner didnt actually incur enough medical expenses to use the funds in the first place the remaining account balance simply carries over to be used in a subsequent year.
What Are The Contribution Limits To An Hsa
The IRS also sets the amount that can be contributed to an HSA on a pre-tax basis. The 2022 annual limits are:
- $3,650 for an individual
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What Is A Medical Savings Account
The term medical savings account can refer to any of several tax-benefitted arrangements enacted since the early 1990s. However, it also refers to a specific type of medical savings account that was authorized and regulated under the Internal Revenue Code in the early 1990s. This type of account evolved into a health savings account .
Some Medicare Advantage plans offer Medicare MSAs. These accounts are regulated by the administrators of Medicare, the Centers for Medicare and Medicaid Services.
Have A Plan For Income Taxes
Campbell noted that many people focus on accumulation planning for retirement, but many neglect distribution planning. As in, the taxes you will have to pay when you take your money out.
Think about tax-diversified sources of income, like after-tax accounts, he said. For example, a Roth IRA allows you to contribute after-tax dollars, which then grow tax-free and can also be withdrawn tax-free. This is a good place to keep high-growth investments that would otherwise result in a large tax bill in retirement. Roth IRAs do come with income limitations, but there may be ways around them, such as a backdoor Roth IRA. Its always a good idea to speak with a financial advisor about the best tax strategy for your retirement investments.
Heres more information about taxes in retirement:
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Can I Distribute Hsa Funds For Non
Health Savings Account funds can be used for general non-medical purposes, without penalty once you reach age 65. Any withdrawn funds used for non-medical purposes are subject to income taxes.
The federal penalty for using HSA funds, if you are under age 65, is 20 percent tax penalty, plus the loss of tax-free treatment for the distribution of funds.
HealthEquity does not provide legal, tax or financial advice. Always consult a professional when making life-changing decisions.
Medicare Medical Savings Accounts
As of 2021, a Medicare MSA is available with a high-deductible Medicare Advantage plan . The MA plan deposits funds to the insured’s MSA, allowing the insured to use the funds to pay for medical care even before the deductible is reached. The Medicare MSA is similar to an HSA, allowing users to choose their healthcare providers and services. However, although Medicare MSA funds may be used for services not covered by Medicare, only the cost of Medicare services will be counted toward meeting the deductible.
For an extra cost, some Medicare MSAs cover extra benefits not covered by the MA Planfor example, dental care, vision care, hearing aids, and long-term care. However, Medicare MSAs do not cover prescription drugs. Enrollment in Medicare Part D is required for Medicare coverage of prescription drugs.
People who are enrolled in a Medicare MSA can use funds from the account to pay for medical expenses even before reaching the high deductible of their insurance plan.
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Contributions For An Hsa
The contribution limit for an HSA depends on if the health insurance plan covers an individual or the entire family. For individual plans, the 2022 contribution limit is $3,650.00 for family plans, the limit is $7,300.00. HSA owners age 55 and older may contribute an additional $1,000.00.
Any contributions made to an HSA, whether from the owner, family, or an employer, count toward the contribution limit.
HSA owners with a Traditional or Roth IRA may make a one-time Qualified HSA Funding Distribution up to the HSA contribution limit. SEP and SIMPLE IRAs are not eligible for these distributions.
Hsa Rules For Withdrawals
If you withdraw money from an HSA for any reason other than to cover eligible medical expenses, you will be subject to a 20% penalty on the amount withdrawn unless you are age 65 or older. This 20% penalty is double the 10% penalty that applies to early 401 or individual retirement account withdrawals. Money withdrawn from an HSA not used for qualifying medical or dental expenses is taxed as ordinary income, regardless of whether you incur the penalty.
Unlike with flexible spending accounts, you do not have to spend money in an HSA in the same year you make the contribution. You also are not subject to the rules for required minimum distributions that apply to other types of pre-tax retirement savings accounts such as 401s and traditional IRAs.
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Who Can Open An Hsa
To qualify for an HSA, you must have a high-deductible health plan and no other health insurance. You must not yet qualify for Medicare, and you cannot be claimed as a dependent on someone else’s tax return.
A primary concern many consumers have about foregoing a preferred provider organization , health maintenance organization , or other health insurance in favor of a high-deductible health plan is that they will not be able to afford their medical expenses.
In 2021, the deductible for an HDHP is at least $1,400 for self-only coverage and $2,800 for family coverage . Depending on your coverage, your annual out-of-pocket expenses could run as high as $7,000 for individual coverageor $14,000 for family coverageunder an HDHP . High expenses can be one reason these plans are more popular among affluent families who will benefit from the tax advantages and can afford the risk.
However, a lower-deductible plan such as a PPO could have high costs because youre paying the extra money regardless of the size of your medical expenses that year. With an HDHP, by contrast, you’re spending more closely matches your actual healthcare needs.
Of course, if you know your healthcare costs are likely to be higha woman who is pregnant, for instance, or someone with a chronic medical conditiona health plan with a high deductible may not be the best choice for you. But keep in mind that HDHPs completely cover some preventive care services before you meet your deductible.