Medical insurance and expenses are one of the largest concerns for many of the people we talk to. Both while working, and in retirement. PPO, HMO, HDHP, IRMAA, FSA, etc. There are lots of letters associated with these topics, but unfortunately not all of us know what they all mean or how to utilize them. There is another acronym that we think is one of the most significant tools available to us: the Health Savings Account (HSA).
https://www.cms.gov/marketplace/outreach-and-education/health-savings-account.pdf
What is an HSA and why is it so important? A HSA is a savings vehicle that is only available to participants in a High Deductible Health Plan (HDHP). It allows the participant to save for future healthcare needs on a pre-tax basis. As long as the proceeds are used to pay for qualified medical expenses, distributions are also tax free. Here are a few key things to know about HSAs that some of the people we talk to haven’t always been aware of:
- You may be missing out on some free money: You can defer salary into your HSA account, but many employers also provide some level of contributions to the account for each employee that participates each year. Review your benefits information at your employer!
- You can invest: Most HSA custodians require a client to keep a certain minimum amount in cash to pay for any upcoming expenses you pay for out of the account, such as $1,000. Once you have hit that amount, you can choose investments for the excess, much like you do for a 401K or other retirement plans. Typically, you will have stock and bond mutual fund options, as well as Target Date Funds, etc. Also, the amount of money spent on medical expenses is larger than most anticipate so growing this small account to a larger portion of your retirement savings can help. https://crr.bc.edu/wp-content/uploads/2022/06/IB_22-10.pdf
- This is not ‘use it or lose it’: HSAs have a ‘cousin’, which is the FSA (Flexible Spending Account). The FSA can also be funded to pay for medical expenses, but FSAs must be used by the end of that year or you lose the remaining balance. HSAs do not have this requirement, so you can save in the HSA for many years, including into and through retirement.
- No Required Minimum Distributions (RMDs): While some long-term savings vehicles such as traditional IRAs or 401Ks require you to take out certain amounts each year starting in your 70’s (specific age depending on when you were born), HSAs do not have RMDs associated with them.
- Powerful tool for early retirement: You do not qualify for Medicare until age 65. For people who want to retire early, the years before 65 can be very expensive paying for an individual insurance policy. Many people don’t know that an HSA can be used to pay for those monthly premiums for that individual policy in the years before you qualify for Medicare.
- HDHP headaches: We periodically talk to people who switch from a traditional health insurance plan to a HDHP, and then are frustrated when they have significant out-of-pocket expenses. One of the best planning strategies is to try to fully fund your HSA annually but also to have other savings to pay for your out-of-pocket medical expenses so that your HSA can continue to grow in order to maximize the tax benefit and build a larger HSA for future medical expenses.
Are you already using this powerful tool for long term healthcare savings? Are you thinking about starting to use one? Let us know if you’d like to discuss how they fit in your overall financial situation.
Watch for upcoming invitation information on a Webinar we will be hosting: Top Tax Planning Ideas for 2024, Thursday March 7th at 6:00 CST. Our guest presenter will be Tim Steffen, CPA-PFS, CFP®, CPWA® Managing Directorand Director of Advanced Planning at Robert W. Baird & Co.
Thank you from all of us with the Wolfe Kobes Group
Jean, Kurt, Molly, and Anders
VK2024-0209