By Echo Huang, CFA, CFP®, CPA
A Health Savings Account (HSA) can be a powerful tool to help you save and invest, now, to pay for your qualified medical expenses (QMEs) during retirement. The HSA has become popular as more and more employers move to high deductible health plans (HDHP) in order to reduce insurance premiums. Employees must choose the HDHPs instead of traditional health insurance plans if they want to use their HSAs to fill the gap. I have used HSAs personally for about 10 years and I want to share these essential facts with you:
- The HSA provides triple tax benefits. Contributions are made with pre-tax dollars (free of federal, state and FICA taxes) through payroll if your employer offers it. If you purchase an HDHP on your own in the insurance market, you can set up your own HSA online and make contributions before the tax return filing deadline. You can choose to invest the balance and the growth is tax-deferred. Distributions are income-tax free if you use them to pay for qualified medical expenses (QME). "Typical" retiree expenses on health care are often as high as $500/month (or $1,000/month for a married couple), much of which are HSA-eligible QMEs, including Medicare premiums and out-of-pocket medical costs (although Medigap coverage doesn't count).
- How much can I contribute per year? For a self-only HDHP, you can contribute up to $3,400 in 2018 ($3,500 in 2019). For a family HDHP, you can contribute up to $6,900 in 2018 ($7,000 in 2019). If you are age 55 and older, you can contribute additional $1,000.
- The HSA balance does not expire, unlike the Flexible Spending Account (FSA). You don't have to spend the balance within the calendar year. You can keep the receipts of QMEs and get reimbursed from your HSAs many years from now as long as the expenses have not been reported as medical expenses on tax returns and increased your total itemized deductions. If your income is not low, it is difficult to get tax benefits through reporting medical expenses on Schedule A because total QMEs for the calendar year must exceed 7.5% of adjusted gross income (AGI) to generate tax benefits. Beginning in January 1, 2019, the 7.5% of AGI will increase to 10% of AGI. If your AGI is $100,000, you must incur greater than $10,000 QMEs in one year to be worth it to report them on Schedule A. Therefore, if you don't get tax benefits from your tax returns, then you can save the receipts and file them in a folder called "To Be Reimbursed from My HSA" - you decide the timing of distributions in the future.