By: AnnaMarie Mock, CFP®
Based on the Bureau of Labor Statistics Consumer Expenditure Survey, the average cost per person for healthcare increased 101% over the last 35 years from $2,500 to $5,000, and the healthcare system increased by 4.6% over 2018 to reach $3.6 trillion!
With healthcare costs being a significant part of a household’s budget, are there are solutions to combat the increasing costs of health insurance?
The Triple Tax Benefits of HSAs
Well, a health savings account (HSA) is designed for an individual or family to save pre-tax money up to the annual limits for either short term medical expenses or long-term retirement planning. In an earlier article, "Healthy HSAs," I outline the benefits and nuances associated with HSAs, but the main appeal of an HSA is the triple-tax advantage:
Contributions are tax-deductible
All earnings and interest are tax-deferred
Withdrawals are tax-free if used for qualified medical expenses
Similar to Individual Retirement Accounts (IRAs), HSAs are also individually held accounts meaning that there cannot be joint HSAs. An HSA contribution can only be made by the insured participant in a high deductible health plan (HDHP).
Can Your Spouse Participate in Your HSA?
If one spouse is covered by the HDHP and the other is not, the HSA contribution can only be made by the spouse covered under the HDHP for the single contribution limit of $3,550.
However, if both spouses are covered under one HDHP, either each spouse can fund their own HSA up to the individual limits or fund one account up to the family total of $7,100. If both spouses are age 55 or over, they can contribute an additional $1,000 each as a catch-up contribution. However, both spouses must have their own HSA to be the recipient of the catch-up contribution.
Beware of Overfunding Your HSA
If your HSA is overfunded above the limits for the year, there may be tax and penalty implications. Any excess contributions made by the employer will be added as taxable income to the employee, and any excess contributions you personally make will not be tax-deductible.
In addition to the loss of deductibility, there will be a 6% excise tax applied every year; the amount remains in the account unless it is corrected by the tax filing deadline. Overfunding it can be very costly over time and significantly minimize the triple-tax benefit.
According to EBRI HSA Database, there were 25 million HSAs as of the end of 2018, and 71% of the HSAs have been opened since 2015. I suggest taking advantage of an HSA if offered because this is a good tool to combat increasing medical costs. Ideally, individuals fund their HSA account annually and invest the assets for the long-term, taking advantage of the tax-free growth for medical costs in the future and retirement.
If you have any questions, please reach out to the HIGHLAND team.
Author’s Bio
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.