The cost of health care can pose a significant expense—and a big concern—for most investors.
Whether your covered by a workplace health insurance plan or a public program such as Medicare or options under the Affordable Care Act (ACA), there’s a good chance that health care costs are top of mind for a lot of investors right now.
Premiums you must pay seem to be ever-escalating; the coronavirus pandemic has heightened health concerns. Such concern can be particularly acute for individuals who do not yet meet the age 65 minimum for Medicare eligibility.
Health Savings Accounts (HSAs) provide a hedge against some of that uncertainty by providing a tax-sheltered, tax-deductible savings and investment vehicle. While the main purpose of HSAs is to defray health care costs, their flexibility also makes them a versatile and powerful tool for building wealth.
The HSA Basics
What are they? HSAs are tax-sheltered savings accounts available only to those enrolled in a high-deductible health plan (HDHP). An HSA provides tax benefits intended to defray the higher deductibles and out-of-pocket maximum costs of an HDHP.
Why use them? In tax-advantaged accounts such as IRAs and 401(k) plans, you can pay taxes up front or defer them—either way, taxes will eventually come due. With an HSA, you are able to never pay tax—contributions and earnings are tax free. The tax savings can compound to produce higher returns than those available from other accounts.
How to use them? How best to use an HSA depends on how much clients can afford to save. If they have enough savings ability, it’s best for them to treat their HSA as a long-term investment. In other words, they should pay for current medical expenses out of pocket. The more limited their ability to save, the more complex the decision.
It’s difficult to overstate how powerfully an HSA can augment an individual’s saving power, through the combined effects of tax-free contributions and compounding when invested.
While the funds are earmarked for qualified health-related expenses, in practice they can be used at any time for any purpose—provided the account owner has receipts for qualified health expenses that offset the withdrawal amount. Any individual health expense can only be claimed once. Therefore, accurate and organized recordkeeping is paramount. Note that withdrawals without offsetting, qualified expenses are subject to ordinary income tax and a 20% federal penalty tax for those under 65.
So theoretically, a client could withdraw HSA money—tax-free—to pay for a semester of a child’s college tuition; or for emergency house repairs. The only requirement would be to have enough documented, qualified, health-related expenses to offset the distribution amount.
Over the years individuals move, throw things away, and inevitably lose track of items they don’t use on a daily basis—such as deductible receipts. As an advisor, we can help you to digitize and securely archive eligible health-related receipts (along with other important financial information).
You can think of your tax savings on HSA contributions as a “taxcode bonus.”
Conclusion
Health care costs are inevitable. HSAs represent a unique opportunity to create a shield of protection and prepare for all types of health care costs. And remember, don’t just rely on your company’s health care plan or Medicare plans to save the day. The prescription may just be too expensive and you’ll have to tap into those retirement accounts.
If you would like to discuss your situation with us or see one of our case studies let us know at info@crosspointwealth.com
