Q: Some of my coworkers put money into HSAs. I’m not sure if this is something I should consider. Can you please tell me a bit more about how they work?
A: Thanks for this question. Many more people today understand the potential benefits of contributing to a Health Savings Account (HSA). Here’s what you should know to determine if this may be a good choice for you.
Lowering Your Tax Bill with an HSA -— Today and in Retirement
For years, Americans have been schooled on the benefits of saving: for retirement, a child’s higher education and even a rainy day. It’s time to add another item to that list: health care. As health insurance premiums, deductibles and copays rise, the need to set aside funds, specifically for medical costs, has become a reality for a growing number of people.
Enter the health savings account (HSA). Created in 2003, HSAs are special savings accounts that can be used to pay for out-of-pocket health care costs. Contributions are generally tax deductible, and withdrawals for qualified costs are tax free. What’s more, since unused balances can be carried over from year to year, they can be used to fund health care costs today and in retirement.
But some restrictions do apply. Here is a summary of HSAs and their different features:
Eligibility
You can open an HSA, whether through your employer or on your own, provided you:
• Are currently covered by an HSA-qualified high-deductible health plan (HDHP).* For 2019, that deductible must be at least $1,350 for single coverage and $2,700 for family coverage;
• Do not have other health coverage (although certain types of insurance are allowed, such as dental and vision care);
• Cannot be claimed as a dependent on someone else’s tax return; and
• Are not enrolled in Medicare.
Contributions
Your contributions to an HSA are tax deductible and there are no income or phase-out restrictions. Employers can make nontaxable contributions on behalf of their employees. But the annual limits listed below still apply.
• For 2019, singles can contribute up to $3,500 and families can put away up to $7,000.
• If you’re 55 or older anytime in 2019, you can contribute an extra $1,000.
• Contribution limits are adjusted annually for inflation.
Withdrawals
You can tap into your HSA tax and penalty free to pay for any “qualified medical expense” incurred on behalf of you, your spouse or your dependents. Below is a partial list. See the IRS website for more detail on qualified expenses.
Qualified expenses:
• Preventative care, including doctor visits and screening services
• Prescriptions
• Dental care
• Vision care
Unqualified expenses:
• Insurance premiums (limited exceptions apply)
• Non-prescription drugs (except insulin)
• Expenses incurred before you establish your HAS
Note that any withdrawals that aren’t for qualified medical expenses are taxable and may be subject to an additional 20 percent tax.
Additional Features
HSAs can be invested in a variety of different vehicles, and interest accumulates tax free and if you leave your job, your HSA goes with you.
Once you reach Medicare eligibility age (currently age 65), you can take withdrawals from your account for any reason without penalty, not just for medical expenses. But be warned: If not used for medical care, withdrawals are no longer federally (and in some cases, state) tax free.
Upon your death, your HSA can be passed along to your surviving spouse. Unmarried individuals can pass the account to their beneficiary or estate; however, applicable taxes will apply.
If an HSA sounds like it might work for you, contact your employer to see if it offers one, or open one directly through one of the many online providers.
Jeremy R. Gussick is a CERTIFIED FINANCIAL PLANNER™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBT community and was recently named a 2018 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected].
Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
This article was prepared with the assistance of DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This communication is not intended to be tax advice and should not be treated as such. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
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*As reported by Financial Planning magazine, June 1996-2019, based on total revenues.
**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2018 Five Star Wealth Managers.