An HSA (Health Savings Account) is a blessing from Congress. Political affiliations aside, they are awesome. Let’s take a look at what an HSA is, how they work, and why they kick ass.
What is this HSA we speak of? An HSA is a type of savings account that is used to pay for qualified medical expenses. To have an HSA you first need to be enrolled in a HDHP (High Deductible Health Plan). A HDHP will have lower monthly premiums but at the cost of a higher deductible – tradeoffs. So, if you are healthy, a HDHP could be a great fit for you; and the HSA that comes with it you’ll love.
So how do the taxes work with an HSA? The money that goes into an HSA, whether from you or your employer, goes in pre-tax. That money inside the account grows every year without tax, or tax-deferred. And then, if you use the money for qualified medical expenses, it is tax-free. That is a savings vehicle with triple tax advantages! No tax on the way in, none while it grows, and none if you use it properly on the way out.
HSA’s in retirement, aka why we love them. An HSA’s balance rolls over from year to year, it’s not a use it or lose it thing. Let’s say you get to retirement and have $250,000 in your HSA; that means you have $250,000 to use towards qualified medical expenses while paying no income tax on those dollars. That’s a huge planning opportunity for clients considering a couple will need over $250,000 to cover medical expenses in retirement today. Ridiculous! But, the reality is that healthcare costs are rising fast and we’re living longer than ever before. So maybe it’s not a bad idea to pack your lunch a few times next week? You know, save a couple bucks for later.
You can also access your HSA dollars after age 65 for any reason with no penalty, however you will owe income tax on those dollars. An interesting strategy is that you can take money out of an HSA to reimburse yourself for medical expenses you paid for out of pocket in the past. So save those bills and receipts!
Ultimately, a big planning opportunity we see for our clients is to enroll in a HDHP and start an HSA. Max it out, and then let that money grow so you have it when you really need it! There’s no need to use your HSA for every eligible expense right now. If you have the means, pay out of pocket, save your receipt, and then let your HSA grow like a weed. The account grows tax-deferred, so give it time and let it work its magic! So, when you’re no longer working and have more medical expenses you’ll have a nice plump HSA to pull from. Right now, you’re the youngest, healthiest you’ll ever be, and you’re earning an income! When you’re retired you won’t have that paycheck coming in every 2 weeks and you’ll be thankful that you have accounts that you can use to cover both medical expenses and living expenses.
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