As an Empty Nester, retirement is at the forefront of my mind a lot of the time. It may be the silence in our home that turns my thoughts to how do we prepare for our next big stage in life? Retirement!
If you are looking to lower your health care cost and plan for retirement, an often overlooked retirement planning tool is a Health Savings Account (HSA).
I know it was a savings option that Rob and I ignored for years!
It wasn’t until we started researching all of the benefits that we realized that we spent years missing out on a great opportunity to build tax-free wealth.
With all of the short-term thinking we do, the full potential of this tax-free savings tool is easily ignored.
So let’s stop ignoring the HSA and start saving on health care and building our retirement savings. Since it is a tax-free account, there are a few rules that you must follow.
In this article we will cover the health care saving account rules and how to maximize your account:
- What is a Health Saving Account (HSA) and how does it work?
- What are the benefits of an HSA?
- Is there a limit on the amount of money I can save in my HSA?
- How is an HSA different from an FSA?
- Can you use an HSA as part of your retirement savings portfolio?
- Can I use my HSA to pay for health care premiums?
- What happens to an HSA if I die?
- Does an HSA expire?
- Can you cash out an HSA account?
- How do I set up an HSA account?
What is a Health Saving Account (HSA) and how does it work?
An HSA is a tax-free savings bank account that allows you to your invest money for your future health care costs such as deductibles, copayments, coinsurance, and other medical related expenses.
When I found out the tax benefits of an HSA, I quickly kicked myself for not seeing the potential of this savings account sooner.
I looked at it as I rarely go to the doctor, so why would I need to save a ton of money for doctor expenses?
Then it hit me…save money on our taxes now and save for our future!
When it comes to saving for your future, there are just a handful of savings solutions that offer tax benefits. Most commonly we think about the 401k, the Individual Retirement Account (IRA), and the 529 college savings plan.
These are all great options to save for your future, but the coolest tax benefit account has to be the HSA! Why is it the coolest tax benefit account?
Well, it has to due to the three tax benefits you receive when you use your HSA:
- Pre-taxed Contributions: You do not pay taxes on the money you save in the HSA account.
- Tax-Free Withdrawals: The money you withdraw from the account is tax-free if you use it for qualified expenses.
- Tax-Free Growth: Money saved in your HSA can often be invested. The growth from your investment is tax-free!
With this being a tax-exempt savings option, you do want to ensure that the IRS rules are closely adhered to:
Just know, we are in no way tax advisers or financial planners. We are just a couple looking at our future and seeing the possibilities that this savings vehicle has available for us.
We are Empty Nesters who are now 100% aware that we are getting old and health care costs are rising.
Our delusion of being young forever has totally been busted!
Here are a few qualifications that you must meet to qualify for a health savings account:
- Participate in a High Deductible Health Plan (HDHP): In order for you to qualify to set up a tax-exempt-savings-account for IRS qualifying health care expenses, you must participate in an insurance plan with a minimum deduction amount.
For 2019 the deductible must be at least $1,350 for an individual or $2,700 for a family
- Contribution limitations are established annually by the IRS: Since this is a tax-exempt option, the IRS does provide limits to the amount of money that can be set aside in an HSA account. This amount is updated annually and is capped by two classifications: individual or family.
IRS Limitations for 2019 are $3,500 for an individual and $7,000 for a family – If you are 55 or older, you can contribute an additional $1,000
- Other Insurance? You cannot be covered by another non-qualified health care plan such as your spouse’s PPO.
- Claimed as a dependent. You cannot be claimed on another individual’s tax return (such as your parents.)
What are the benefits of an HSA?
We are human and we are going to get sick. Something is bound to come up in which we will need to go to the doctor, the hospital, or have some fancy test that could cripple us financially.
A health savings account is designed to protect you by making sure that you are prepared.
In 2017, a Kaiser Health Tracking Poll found that many would struggle if an unexpected medical bill were to arise:
- 19 percent wouldn’t be able to pay the medical bill at all
- 45 percent of said they would struggle
- 20 percent would use a credit card to pay the bill over time
- Others responses indicated that they would need to borrow money from a friend, a family member, a bank, or a payday lender.
When it comes to health care, we are all at risk of incurring unexpected expenses. One of the greatest benefits of having a health savings accounts is that you are prepared.
In 2018 our son had some unexpected health care expenses. Since we have a high deductible insurance plan, we had an out-of-pocket expense of $3,000 to pay for our deductible.
Thanks to our HSA account, we were able to take care of our son and not worry about our finances.
Our HSA was our peace of mind!
Is there a limit on the amount of money I can save in my HSA?
The health saving account is viewed as a long-term savings account. Remaining funds are rolled over year after year and do not have a limitation on how much you can save.
Dave Ramsey states he has over $150,000 in his HSA.
How is an HSA different from an FSA?
Due to the requirement of participating in a high deductible health plan, health savings accounts are not available to everyone.
If an HSA is not available for you, you may wish to consider a Flexible Spending Arrangement (FSA) to assist you with your known annual health care costs.
Years ago the company that I worked for provided PPO health insurance that paid for nearly everything so we did not have an HSA available to us.
When it came to paying for our daughter’s braces, our insurance capped out at $1,500.
Since our daughter’s braces cost more than the amount the insurance would pay, we used a Flexible Spending Arrangement (FSA) account to pay the difference.
The FSA is another option to set aside tax-free money to pay for health care, yet there are two really big differences:
- The FSA is the “use it or lose it” plan (this applies if you leave your employer and money is still in your FSA)
- Your maximum contribution is capped much lower (2019 contribution limit is $2,700)
Can you use an HSA as part of your retirement savings portfolio?
Since we have faced the truth that we are no longer young, we decided to look at the expected cost of health care when we retire.
The numbers were sobering.
When we saw the numbers estimated by Fidelity, we had to ask ourselves: do we really want to pay for that with the taxable money that we will have in our 401k?
Heck, no was our answer!
The Fidelity Retiree Health Care Cost Estimate concluded $280,000 may be required to pay for health care expenses such as coinsurance and copay’s associated with Medicare for an average retired couple age 65 in 2018.
The estimate does not include over-the-counter medications, most dental services, long-term care and other health care related expenses.
Health care is creating a ‘retirement cost gap’ for many pre-retirees,” says Steve Feinschreiber, senior vice president of the Financial Solutions Group at Fidelity. “Although many assume their savings will cover all of their expenses in retirement, health care costs are often higher than anticipated. Many people assume Medicare will cover everything, but it doesn’t. The average 65+ year-old retiree today should expect to pay around $5,000 a year on health care premiums and out-of-pocket expenses. So, you should carefully weigh all options.
Using your HSA to prepare you for the cost of health care when you retire:
After reviewing the possible costs of health care during your retirement years and knowing the tax benefits of a health savings account, you can easily see why many are contributing today and opting to pay for their health care expenses so they can use their money during their retirement years.
Here is a bit of food for thought on using the HSA as a retirement fund:
- The money that you contribute provides you with a tax deduction for the current year. This benefit is the same as your 401k or Traditional IRA. (ROTH IRA contributions are not deductible.)
- Money withdrawn for qualifying medical expenses is tax-free. A tax-free withdraw is only available with a ROTH IRA or a ROTH 401k because you paid taxes on the contribution money.
- If you qualify you can deposit up to $7,000 in 2019 for a family. IRA contributions for limits for 2019 are $7,000 which may make this a great account to stash even more money for your future.
- You do not have a minimum distribution requirement when you turn a certain age. With an IRA or a 401k, you must take a distribution (withdraw money) when you turn 70 ½.
- There are no income thresholds. Unlike the ROTH IRA, you are not excluded from eligibility once your income reaches a predetermined level.
Can I use my HSA to pay for health care premiums?
Since we are exploring the idea of early retirement, our first thought was that we could use the monies to pay for medical premiums. We were a bit disappointed when we found that the IRS rules state that you can only use the HSA to pay for medical premiums in the following situations:
- You are on state or federal unemployment
- Insurance for long-term care
- If you are older than 65 years old you can pay for health care coverage as long as is not a supplemental Medicare policy such as Medigap
- Continuous coverage like COBRA
What happens to an HSA if I die?
With the realization of time passing, estate retirement goes hand in hand with this one.
Just like any bank account that you own, you want to make sure that you have designated a beneficiary. If you do not designate a beneficiary for the account, the money will become taxable on your final income tax return.
When your spouse is your beneficiary, they will continue to enjoy the tax-free benefit of your contributions. If your beneficiary is not your spouse, that money will be taxable when your beneficiary files their taxes.
In a Kiplinger article, they indicate that the beneficiary has one year to request tax-free reimbursement for medical expenses you incurred yet did not have the opportunity to request a reimbursement.
Does an HSA expire?
Unlike a Flexible Spending Account (FSA), a Health Saving Account (HSA) does not expire. It does not follow the “use it or lose it” mantra and the money is yours regardless of where you work.
The HSA can be such a powerful tool as it allows you to purchase a more economical insurance choice, a high deductible health care plan, and then stash that savings into an account that is not taxed.
It can be a win-win opportunity for those that do not incur a ton of medical expenses!
Can you cash out an HSA account?
Since the money in the HSA is yours, you can withdraw funds at any time.
The catch is, if you are withdrawing the money for any other reason then paying for health care, the money will then be taxed as ordinary income. If you are not 65 or older or disabled, a twenty-percent penalty will apply.
How do I set up an HSA account?
Rob and I used the HSA account that my employer offers with my high-deductible health plan. I worked with my human resource office to set up tax-free payroll deductions that automatically deposit to my HSA account.
My paycheck occurs every other week. I have payroll deductions setup every payday to allow us to easily deposit small amounts of money into the account 26 times a year.
If your employer does not offer an HSA or you are self-employed, and your insurance plan meets the requirements mention earlier in this article, you can open an HSA at a qualifying financial institution.
Be sure to read the fine print as HSA accounts like many other bank accounts can have hidden fees.
A Few Final Thoughts
Planning for your future is up to you! You are the only one that knows what your needs are and that can plan for those needs.
Today is the day to sit down, review your goals and see what tools you have available to you that will prevent you from being the one of the “19 percent wouldn’t be able to pay the medical bill at all.”