bY Sue Whitesell
Health savings accounts are primarily used as a savings vehicle to help people pay out-of-pocket medical expenses. However, some people may be able to use them to save for retirement as well.
Health savings accounts (HSAs) were created in 2003 as a savings vehicle to help people pay out-of-pocket medical expenses. Although that is their primary purpose, HSAs contain several features that could potentially make them viable as a retirement savings vehicle for some individuals.
The nuts and bolts of HSAs
An HSA is essentially a medical savings account available to those enrolled in a qualified high-deductible health plan (HDHP). HSAs offer several tax-saving features. For example, contributions are deductible (or excluded from income), account earnings accumulate tax free, and, as long as the medical expenses paid with HSA savings are “qualified” expenses for the individual, spouse, or dependents, HSA withdrawals are tax free.
Qualified expenses: Qualified expenses include doctors’ fees, hospital services not paid for by insurance, and prescriptions, among others. While health insurance premiums generally are not considered qualified expenses, there are some exceptions. For example, individuals receiving unemployment compensation can use HSA funds to pay for health care coverage.
Qualifications to open an HSA: To open and contribute to an HSA, individuals must have a qualified high-deductible health plan. In addition, they generally cannot have other health coverage (although certain types of insurance are allowed, such as vision and dental care) or be enrolled in Medicare.
To qualify, the high-deductible health plan must have an annual deductible of at least $1,350 for self-only coverage or $2,700 for family coverage (for 2019). Also, the sum of the annual deductible and other annual out-of-pocket expenses (other than premiums) required to be paid under the plan cannot exceed $6,750 for self-only coverage and $13,500 for family coverage (for 2019). These amounts are adjusted for inflation annually.
Setting up an HSA is similar to setting up a traditional savings account or an individual retirement account (IRA) in that it can be opened with a lump-sum payment or through an arrangement to make contributions on a regular basis.
Contributions: In general, the maximum contribution to an HSA in 2019 is $3,500 with self-only coverage and an additional $1,000 in catch-up contributions for those aged 55 years or more. The maximum family contribution for 2019 is $7,000 plus a $1,000 maximum catch-up contribution for participants aged 55 years or more. These limits will be adjusted for inflation in future years. An individual’s employer or family member may also contribute, as long as the total contribution amount doesn’t exceed the limit.
Contributions can be kept as cash or invested in other options that may be available, such as stock or bond funds. Any money not spent during the year is rolled over for subsequent years. A relatively healthy individual could accrue a sizable HSA balance over a number of years.
You should consider a fund’s investment objectives, charges, expenses and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before investing or sending money. Shares, when redeemed, may be worth more or less than their original cost.
Rules for withdrawals: The rules for withdrawals are quite flexible. An individual with an HSA may make a withdrawal at any point in the future for any qualifying expense incurred since the HSA was first opened. For example, a child needs dental work and her parent pays the $2,700 cost out of pocket this year. If the parent saves the receipt, the parent could use that bill 25 years later in retirement as the basis for an HSA withdrawal. In addition to the receipt, the parent would need records showing that the expenses were not previously paid or reimbursed from another source or taken as an itemized medical deduction.
Using an HSA to save for retirement
The combination of favorable tax treatment, the potential opportunity to invest contributions in longer-term assets, and the flexible withdrawal rules make HSAs particularly attractive as an alternative retirement savings vehicle for certain individuals. An individual who currently maximizes contributions to all tax-favored retirement accounts for which he or she qualifies and who also saves in taxable accounts could treat the HSA as another option to save more and to save in a tax-favored way. Essentially, the individual could treat the HSA as a retirement savings account and let the assets compound for as long as possible while paying out-of-pocket medical costs with taxable funds.
However, for those who cannot fund all tax-advantaged retirement vehicles, the decision to use a HSA as a retirement savings account is less clear cut. It may make sense in this situation to try to fund a 401(k) or other tax-advantaged retirement savings account, especially if there is an employer match. As always, each individual’s situation is unique and the input of an experienced advisor can be invaluable when considering different retirement savings options.
Susan A. Whitesell is vice president/investments, financial Advisor at the Kingston Retirement Group of Janney Montgomery Scott. Reach her at 570-283-8140 or visitkingstonretirementgroup.com. Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Prepared by DST Systems, Inc. Copyright 2019.