Rethinking Your HSASubmitted by LWM | Linden Wealth Management LLC on September 13th, 2017
Health Savings Accounts (HSA) are proliferating as health care costs rise and individuals become savvier. It's estimated these accounts will top $53 billion by the end of this year. Few have focused on how flexible and powerful HSA's are from an investment perspective.
To date, the majority of users simply reimburse out-of-pocket health care expenses as they occur and don't look at these accounts as an investment vehicle. That is beginning to change.
Anyone can set up an HSA provided they're enrolled in a high-deductible health plan. For example, self-employed, those enrolled in the Affordable Care Act, and even those with group plans whose employers don't provide. Individuals have a choice among a number of low-cost HSA account administrators with various investment options (https://20somethingfinance.com/best-hsa-account).
The tax savings are substantial and compelling. The maximum allowable contribution in 2017 is $6,750 for families and $3,400 for individuals, plus a $1,000 catch-up contribution for those 55 and older. Individuals in the top tax bracket would save roughly $3,000 annually. Funds can be withdrawn tax-free if used for eligible expenses. That includes investment earnings as well.
Morningstar provides the following hypothetical example:
Sara is in the 25% tax bracket. She maximizes her family contribution to an HSA -- $6,750 in 2016 -- and does so for 30 years, earning a conservative 4% annual return. At the end of this period, she would have $378,573 saved. In contrast, if she used her HSA assets to fund her out-of-pocket health care costs and steered her investment dollars to a taxable account instead, her taxable assets wouldn't compound at the same rate because the tax breaks aren't as good. Even earning the same rate of return she would have roughly $100,000 less if she would have left the funds in her HSA.
The Government is providing a huge tax incentive for individuals to set up HSA's for high-deductible plans. A traditional IRA or 401-(k) can't match an HSA's tax savings or flexibility.
Ideally, you would make the maximum contribution to your HSA, invest those proceeds, and allow the funds to grow tax-free. You would use current cash to pay out-of-pocket health expenses, save receipts, and then tap your HSA in the future to reimburse yourself. No doubt there would be future eligible expenses as well. The list of eligible expenses is extensive (http://www.hsacenter.com/what-is-an-hsa/qualified-medical-expenses).
The flexibility is incredible. Worse case scenario if you use your HSA prior to age 65 for non-eligible expenses you pay a 20% penalty as well as ordinary income taxes. If after age 65, there is no penalty just pay ordinary income taxes as you would if withdrawing from an IRA or 401 (k). Remember if used for eligible expenses withdrawals are entirely tax-free with no time restrictions.
You need to decide if a high-deductible health plan is appropriate for you. Then whether you use the HSA account for current out-of-pocket expenses or as a long-term investment vehicle. Regardless the tax savings are substantial.
Consult with your tax and financial advisor. This information is not intended as a solicitation or guaranteeing an investment rate of return.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.