Health savings accounts: a ‘stealth’ retirement vehicle
If you're enrolled in Medicare, you can't contribute to an HSA – however, you can create one before you enroll in Medicare and still take tax-free money out for qualified medical expenses.
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We're been hearing a lot about health savings accounts – a sort of "stealth" retirement savings vehicle from which investors can withdraw money tax-free for medical expenses.
HSAs are worth a look, although they're not for everyone.
If you're covered by a qualified high-deductible health plan, you can contribute pre-tax income to an employer-sponsored health savings account — or make deductible contributions to an HSA you set up yourself through a brokerage firm. Qualified plans have an annual deductible of at least $1,350 for an individual or $2,700 for a family, according to Healthcare.gov.
A health savings account is an investment account, which can bear interest or be invested in the markets, growing tax-deferred similar to an IRA.
Here's the upside: Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
The IRS in March 2018 issued guidance for 2018 HSA contributions of $3,450 for individuals and $6,900 for those with family coverage ($7,900 for HSA owners age 55 or older), according to the Isdaner & Co. accounting firm in Bala Cynwyd.
One drawback: If you're enrolled in Medicare, you can't contribute to an HSA – however, you can create one before you enroll in Medicare and still take tax-free money out for qualified medical expenses.
What you can pay for with an HSA
IRA adviser and tax expert Sarah Brenner, who works for retirement guru Ed Slott, created a helpful list of all the things you can pay for using money withdrawn tax-free from your HSA:
Qualified medical expenses, including doctor and hospital bills, medical supplies, prescriptions, co-payments, dental care, vision services, and even chiropractic expenses.
Your spouse or child's medical expenses, even if they are not covered by your high-deductible health-insurance plan. Even after your death, your spouse can use the money tax-free for qualified expenses.
Medical expenses in a previous year, as long as expenses were incurred after you established your HSA. That means you do not have to withdraw money from an HSA every time you have a medical expense. You can pay out of pocket, and let your account grow, or reimburse yourself in a later tax year.
Qualified medical expenses incurred even after you no longer have a high-deductible health plan and no longer contribute to your HSA.
Certain Medicare insurance premiums after you turn 65, but not Medigap premiums, Brenner noted.
Not everyone is a fan of HSAs, including reader and local investor Lisa Hastings.
"I personally think HSAs are not worth the bother unless someone is so healthy and has so much extra money that all they really need is catastrophic health insurance," she contends. "People who hawk these often forget to say that HSA plans only come with very high-deductible health insurance. They are fine for young people without health issues, but for people who actually go to the doctor or have regular medications, they are a waste of money," she said.
"The idea [of HSAs] is that you don't pay for insurance you don't need and can save the rest tax-free, but I'd rather pay less for my health costs now and put the money from a lower deductible and health expenses into an investment account."
Speaking of Ed Slott, he will appear in Philadelphia at 2 p.m. Thursday, Nov. 15, at Trinity Memorial Church, 2212 Spruce St. Slott will address questions about how to reduce or eliminate taxes on distributions from IRAs, 401(k)s, and other retirement savings, including Roth IRA conversions.
Slott is usually on WHYY and other public television channels, so it's a good opportunity to hear him live, courtesy of host Penn's Village, a virtual retirement community in Center City. RSVP by email to info@pennsvillage.org or by calling 215-925-7333. There's no charge for Penn's Village members and volunteers, but a $5 donation is requested from guests.