The start of a new year is often a time to get organized, reevaluate your portfolio, and plan for the year ahead. But many of us often forget to plan for the unexpected, such as an injury, sickness, or medical emergency. Did you know that the average medical bill for a heart attack is $20,246? (1) With a number this staggering, it’s no wonder people are more afraid of healthcare costs than sickness. (2)
But have no fear! There are many ways to plan for rising healthcare costs—the most popular option being a Health Savings Account (HSA). An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. (3) It’s used in conjunction with a high-deductible health insurance plan.
Tax Advantages Of An HSA
Using an HSA has three major tax advantages:
- You make pre-tax contributions. (This lowers your total tax liability at the end of the year.)
- You make tax-free withdrawals for qualified medical expenses.
- Your funds grow tax-free.
As long as you use an HSA for its intended purposes, you never pay taxes on the money in the account. (Think of it as a tax-free trust for your health.) The only time you may be subject to taxes or fees is if you contribute more than the maximum yearly amount or use the funds for non-qualified expenses.
Why You Should Use An HSA
Aside from HSAs being tax-free in every sense of the word, there are a few more reasons why you should set one up.
- Many employers offer HSA contribution matches: Similar to a 401(k) contribution match, if your employer matches $500 per year, for example, you can also contribute $500 and see a 100% return on your money.
- Your HSA funds roll over year-to-year: Unlike Flexible Spending Accounts (FSAs), your HSA funds stay with you indefinitely, even if you switch jobs or no longer have a high-deductible health plan. These funds have no expiration date.
- It’s an efficient way to fund healthcare costs in retirement: You can invest your HSA money in ETFs or mutual funds once you have a certain amount in your account—usually around $2,000. If you choose to invest your HSA funds instead of using them for day-to-day healthcare expenses, you can build your own separate “healthcare” nest egg for retirement.
To qualify for an HSA, you must meet the following requirements: (4)
- You’re covered under a high-deductible health plan.
- You have no other healthcare coverage.
- You’re not enrolled in Medicare.
- You’re not claimed as a dependent on someone else’s tax return.
The contribution limits for 2019 are $3,500 for self-only plans and $7,000 for family plans. (5) If you’re age 55 or older, you can make an extra $1,000 per year in catch-up contributions. You can use funds from your HSA at any time, but you can only make contributions while you’re enrolled in a high-deductible health insurance plan.
The Bottom Line
Although most Americans are eagerly looking forward to retirement, this major life transition comes with a lot of worries, and healthcare costs top that list for 41% of Americans. (6) A Health Savings Account is a great way to alleviate this stress as you prepare for 2020 as well as your golden years. But before you set up your HSA, meet with a knowledgeable financial advisor who can help you maximize its benefits for retirement. At Setchfield Asset Management, we’d be happy to walk you through the fine print and show you how to use it in the most tax-efficient way. Schedule an introductory meeting to see if we are the right fit by emailing me at email@example.com or calling (303) 627-1099.
Steve Setchfield is Chief Investment Strategist at Setchfield Asset Management, an independent financial advisory firm. With almost 30 years of experience, Steve serves his clients by keeping them out of financial trouble in volatile markets, using a low-key, rules-based approach to investing and helping them with every aspect of their financial lives. Steve studied finance at the Metropolitan State University of Denver and spent several years working at Shearson Lehman Brothers and Kemper Securities before founding his own independent firm so he could offer objective, personalized advice and strategies. Steve is a Colorado native and enjoys skiing and other outdoor activities. He spends his free time volunteering for Big Brothers/Big Sisters of Colorado and coaching wrestling in the Cherry Creek school system. In 2003, Steve was a living kidney donor for his uncle who suffered from polycystic kidney disease. To learn more about Steve, connect with him on LinkedIn.