By: AnnaMarie Mock, CFP®
Over the recent past, more individuals have been taking advantage of Health Savings Accounts (HSAs) offered in tandem with high deductible health plans (HDHPs). It is estimated that deposits into HSAs will increase by 22% to $53.2 billion from 2017 to 2018 with direct employer relationships being the leading driver of new account growth.1
HSAs are savings vehicles available only for individuals participating in a HDHP. HDHPs are structured exactly how they sound – they consist of a high deductible that must be met before receiving coverage from the insurance company, but the premiums are less expensive and offer several tax advantages.
HSAs offer many benefits to individuals and are often said to be “triple tax-advantaged.”
· Contributions made into a HSA are tax deductible.
· All earnings and interest are tax-free
· Withdrawals are tax-free if used for qualified medical expenses. Qualified medical expenses include prescription drugs, doctor visits, and lab fees. Generally, insurance premiums are not qualified expenses unless it is used for long term care insurance, healthcare continuation coverage (COBRA), or Medicare coverage.
Because HSAs grow tax-free, it is wise to consider HSAs as another retirement savings vehicle. If you are able to pay for current medical expenses out-of-pocket rather than from your HSA, this will maximize the tax-advantaged nature of your HSA. HSA assets can then be invested in a way that is consistent with your long-term savings goals, rather than being held in cash. In this respect, HSAs offer the benefit of pre-tax contributions, like a Traditional IRA, and tax-free growth, like a Roth IRA. It’s the best of both worlds.
HSAs, also, provide flexibility that allows you to submit receipts for prior expenses and get reimbursed with tax free withdrawals, so an HSA can be used as a hedge against an unexpected medical expense or illness.
You can have an HSA through an employer health plan, bank, credit union, or insurance company. Similar to employer retirement plans like a 401(k), your employer may offer a flat contribution or matching funds if participating in the employer health plan.
12017 Year-End Devenir HSA Research Report. (n.d.). Retrieved from http://www.devenir.com/research/2017-year-end-devenir-hsa-research-report/