Dear Carrie: My employer is offering an HSA this year and I'm wondering if I should sign up. I've also heard that an HSA can be used as a retirement account. Is that true? —A Reader
Dear Reader, Open enrollment is always a good time to review your employee benefits. Even if you've been pretty happy with your previous choices and don't feel that you need to make a change, something new like the possibility of opening a Health Savings Account (HSA) deserves some thought.
And although an HSA isn't strictly a retirement account, you're right that it can be a nice supplement to your retirement savings. But before we get to that topic, let's review some HSA basics.
What an HSA is and how it works
An HSA is a tax-advantaged account that allows you to save for healthcare costs and get a tax break at the same time. It's available through some employers as well as to individuals through some banks or other financial institutions.
There are, however, certain qualifications you have to meet in order to open an HSA:
—You have to have a high deductible insurance policy. For 2017, the minimum deductible is $1,300 for an individual, $2,600 for a family.
—You can't be enrolled in Medicare.
—You can't be claimed as a dependent on someone else's tax return.
In addition, if you do qualify, the tax advantages can be significant. Each year, you can make a tax-deductible contribution up to an annual maximum. Contribution limits for 2017 are $3,400 for an individual and $6,750 for a family. If you're 55 or older, you can contribute an extra $1,000.
And not only are contributions tax-deductible from your gross income, withdrawals are tax-free if used to pay for qualified out-of-pocket medical expenses, including deductibles, copayments, prescriptions, necessary medical equipment, etc. You can also use the funds for medical care not covered by insurance such as dental, vision and hearing.
In addition, if you name your spouse as the beneficiary of your HSA, he or she will become the owner of the account upon your death. He or she can then use the money tax-free to pay for qualified medical expenses, even if not enrolled in a high-deductible plan. (However, if the beneficiary is not your spouse, he or she receives the funds but not the tax advantages.)
One other somewhat confusing but important detail: You can't use HSA funds to pay for insurance premiums. However, even though you're no longer eligible to contribute to an HSA once you're on Medicare, you can use HSA savings to pay for Medicare premiums.
There are several other benefits to an HSA on top of the tax advantages. For instance, unlike funds in a Flexible Spending Account (FSA), there's no "use it or lose it" factor. Your contributions carry over year to year, so you don't have to worry about buying extra eyeglasses and such at the end of the year just to make sure you use the money. And an HSA is portable — if you change employers, you can take it with you.
Another plus is that if you don't need the money for medical expenses, you can invest it — and it grows tax-deferred, just like in an IRA. At 65, you can withdraw the funds for nonmedical reasons without penalty (there's a 20 percent penalty if you're under 65) — however you'll pay income taxes on the withdrawal, just as you would with an IRA.
A couple of caveats
While the upfront tax advantage is great, and a higher deductible generally means a lower premium, the deductible itself is a cost you'll have to cover. That could mean higher out-of-pocket healthcare expenses until you meet the deductible. But the idea is that your reduced premiums and tax advantages will compensate.
You'll also want to look out for potential fees related to the account. There may be a monthly maintenance fee as well as costs related to checks or debit cards. Also be aware of investing costs if you have the opportunity to invest your HSA in mutual funds or other securities. Be sure to get the details from your employer or the financial institution providing the HSA.
A retirement boost
Medical costs are a fact of life, especially as we get older. So even if you're lucky enough to not need the funds in your HSA now, those funds can be a huge help in covering costs once you're retired. You could think of an HSA as an IRA for health care — with the added advantages of relatively high contribution limits for a family, tax-deductibility regardless of your income, and the ability to use the money tax-free to pay for medical expenses at any age.
I like the idea of an HSA to cover health expenses and as a supplement to other retirement accounts but certainly not as a substitute. I'd suggest first and foremost contributing to your 401(k) at least up to the employer match. After that, if an HSA suits your needs, contribute the maximum if you can. With the two working together, you'll be better prepared to cover both your retirement and healthcare needs.
Can you save even more? Then consider an IRA. The beauty is that you can contribute to all three and enjoy triple the tax advantages and triple the opportunity to save!
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at [email protected] This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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