What is a Health Savings Account?
A health savings account is a type of account that lets you experience some savvy tax benefits for future qualified medical expenses.
Some people use this type of account for current expenses but today we will be reviewing the longer term benefits of a health savings account.
According to Investopedia, a couple who retired in the year 2020 could expect to pay approximately $295,000 in total healthcare costs throughout their retirement.
I don’t know about you but that is a significant chunk of cash.
According to this report, millennials are far behind the baby boomers when it comes to saving for retirement.
So, it is safe to say, coming up with $300,000 in retirement for our guaranteed medical woes in retirement has a dim outlook for us tech-savvy millennials.
Who is eligible?
To be eligible for a health savings account, you must meet the following criteria:
- Must be 18 years old
- Must be covered under a qualifying high-deductible plan (HDHP) on the first day of the month
- May not be covered under any other form of medical coverage
- Must not be covered by Medicare
- Must not be claimed as a dependent on someone else’s IRS tax return
If you do not live in the United States, you could still be eligible if you:
- Are a US citizen and are paid in US dollars
- You are employed in the US and are paid in US dollars
- You still would need to apply for a Social Security Number ot Tax-identification Number (TIN)
What are the limits for 2021?
Just like IRA’s or other retirement accounts, health savings accounts have annual contribution limits.
For 2021, the annual contribution limits are:
- Individuals – $3,600
- Individuals with Family Coverage – $7,200
For individuals, you cannot have a deductible less than $1,400 and an out-of-pocket maximum cap of $7,000.
For individuals with family coverage, no deductible less than $2,800 and an out-of-pocket maximum of $14,000.
To find out your deductibles and out-of-pocket maximums, simply call your healthcare provider or use their online login to view.
What are the benefits?
Triple tax advantages
This is by far the biggest advantage and benefit of the health savings account. You are gonna see some sweet tax benefits on health savings accounts in the following 3 ways:
- Contributions are considered tax-deductible
- Earnings experience tax-free growth
- Spending is tax-free on qualified medical expenses
Wow, basically tax-sheltered money where Uncle Sam doesn’t touch it? Sign me up!
First, any money you put into your account is tax-deductible. So, when you get paid, you’re making a deposit with “after tax” dollars.
Then, come tax time, you can deduct those contributions so that they are considered tax-free deposits into your health savings account.
Second, we will go into this further, but you can actually invest your contributions into the stock market.
Trust me, it isn’t as scary as it seems. What is seriously bad ass is that your investment earnings will grow tax free.
Third, when you are using the funds in your health savings account for qualified medical expenses, that spending is not taxed. Click here for a current list of qualified medical expenses. The list is broad and growing every year.
You keep the money
Unlike a flexible spending account, your health savings account money is all yours to keep year to year. Flexible spending accounts are another form of savings that allow you to stash cash away for qualified medical expenses.
However, at the end of the year, it is either a “use it or lose” scenario with the FSA.
This is a great reason to put your money into a health savings account instead.
Another benefit is that you also get to keep the funds if you end up leaving your employer.
Let’s say you end up leaving a job where you stashed away a pretty good chunk of savings in your account. Those funds are yours to keep.
With that being said, I’d definitely recommend you see what fees you may be charged on your old employer plan.
Some health savings account providers begin to charge monthly fees when you are no longer employed with your old job.
There are a ton of great providers who don’t charge monthly fees. Fidelity is one that comes to mind.
Cover your healthcare costs in retirement
You all know how much we love us some ways and strategies to build and grow our wealth here at Simple Savings Cents. When a lot of people think of investing for retirement, a health savings account is probably not the first thing you think of.
As previously mentioned, a retired couple will need approximately $300,000 (after-tax) to cover healthcare expenses in retirement.
That is a pretty good chunk of change and it absolutely makes sense to plan for this, like NOW.
Insert the wonderful health savings account.
You see, with this type of account, you can actually invest the contributions you make similar to what you would do in an IRA or traditional 401(k) retirement plan.
What is amazing is that your earnings in this account also grow-tax free.
So, this can be an additional tool you add to your tool belt when planning for the costs that will arise in retirement.
Let’s run some math. Say you contribute the yearly maximum for your family starting at the age of 30. Assuming you earn a 7% return.
- At age 50, you would have $295,167
At age 50, you could stop contributing to this fund and essentially let it sit to be in place to cover your healthcare costs in retirement.
Now, a common pushback may be, well why don’t I just use my regular retirements to fund healthcare expenses? It comes down to one word.
TAXES
With your traditional 401(k) at work, after 59 ½ you will need to pay ordinary income taxes on the funds you take out.In a Roth IRA, you are paying taxes on the funds you deposit.
Now the health savings account, the funds deposited are tax deductible and the funds you spend on qualified healthcare expenses are made tax-free. You are essentially covering your healthcare costs with 100% tax-free dollars.
Is it for you?
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The tax advantages and ability to invest for retirement are appealing options to consider. However, everyone’s situation is different and unique.
I’d take a look at where you are currently saving and see how the HSA can be an additional tool to your savings strategies.
Of course, you’ll want to have a high-yield savings account for your emergency fund and an IRA for your retirement. Let me know your thoughts on the benefits of a health savings account below.
