February 2021
Financial Planning

Health savings accounts or HSA’s are perhaps the best retirement planning tool available. HSAs are tax-advantaged savings accounts designed to help people who have high-deductible health plans with paying for out-of-pocket medical expenses. There are major advantages to these types of accounts, for instance you can contribute to an HSA until age 65 when Medicare becomes available, and you can contribute up to age 65 even if you're not working. And unlike a Flexible Spending Account, your HSA money is yours forever, and it's portable.

An HSA has three powerful tax benefits. Contributions to the account are tax deductible, or excluded from gross income when an employer makes them. The account can be invested, and income and gains compound tax free in the account. When distributions are taken from the account to pay for qualified medical expenses, the distributions are tax free. You can contribute to an HSA until age 65, even when you're not working. And unlike a Flexible Spending Account, your HSA money is yours forever, and it's portable.

The annual contribution limit for an HSA in 2021 is $3,600 if you have individual health insurance coverage and $7,200 if you have family coverage. For people age 55 and older, an additional $1,000 catch-up contribution is allowed. You can make the contribution, or an employer can contribute to your account. You must have a qualifying high-deductible medical insurance policy. The deductible for individual coverage must be at least $1,400 and for family coverage the deductible must be $2,800.

A little known, but important secret: if you’re looking for cash to fully fund the year’s HSA contribution, a transfer from an IRA might do the job. When you’re fully or partially funding the HSA, a possible source of cash for contributions is your IRA using a qualified HSA funding distribution (QHFD). The QHFD is a once-in-a-lifetime limit per taxpayer and can only be rolled over to cover the maximum contribution for that year only and you must be covered by a high-deductible health care plan for the entire calendar year in which a QHFD is made.

The best way to use an HSA is to treat it as an investment tool that will improve your financial picture in retirement. By waiting as long as possible to spend your HSA assets, you maximize your potential investment returns and give yourself as much money as possible to work with. You’ll also want to consider market fluctuations when taking distributions, the same way you would when taking distributions from an investment account. If you want to talk through your HSA investment options, give us a call at the office!

If you have questions, please contact us.

MARKET UPDATE
COLLEGE AND TAX PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

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