By Matthew Gaude & Shawn McGuire
We live in a society that loves to have options, but sometimes the sheer amount of choices in front of us can be overwhelming. That’s exactly what can happen when saving for retirement. You can save through an IRA, 401(k), 403(b), Roth IRA, or a SEP IRA, and within each of these accounts there are even more decisions to make. Why would you want to add yet another account to the mix?
A Health Savings Account (HSA) has unique features and benefits that might help you reach your goals and meet your savings needs. Here’s why a Health Savings Accounts (HSA) might be a good choice for you and how you can maximize its benefits.
A Bit Of HSA Background
In 2003, the government established Health Savings Accounts as a way for people covered under high-deductible health plans (HDHPs) to get special tax treatment towards saving money for medical expenses not paid for by their insurance. With a HSA, payers were able to receive a tax benefit for saving money to cover their deductible. As HDHPs gained popularity, the government wanted to incentivize saving to cover the higher deductibles so that medical events would not be financially devastating for those with this type of insurance in place.
Making The Most Of Your HSA
It’s important to optimize your HSA to make the most of your tax savings. You will want to use your HSA for all eligible expenses, contribute up to the limit, roll over your balance, and consider using your HSA as a retirement savings vehicle.
The funds can be used for eligible expenses which are determined by the IRS, including costs that aren’t usually covered by health insurance plans, such as deductibles, co-insurance, prescriptions, dental and vision care.1 Most things that would typically qualify for the medical expense deduction on your tax return qualify for a HSA.
Health insurance premiums are generally not considered IRS-qualified expenses unless they are for qualified long-term care insurance, COBRA health care continuation coverage, or health care coverage while an individual is receiving unemployment compensation. For people over 65, qualified expenses include premiums for Medicare parts A, B, D and Medicare HMA, the portion an employee pays for employer-sponsored health insurance and the employee portion of employer-sponsored retiree health insurance. Supplemental policies like Medigap are not considered qualified by the IRS.
Qualified expenses can be paid directly from the Health Savings Account by check or debit card. Reimbursements are also allowed for previously paid medical expenses, as long as the expense was incurred after the establishment of the HSA. There is no statute of limitations for reimbursements as long as the HSA was in existence at the time of the expense.
Roll It Over
Many people confuse HSAs with FSAs (Flexible Savings Accounts). With an FSA, any unused funds in excess of $500 are forfeited at the end of the year. With an HSA, account balances simply roll over from year to year, allowing for incredible growth and accumulation of savings. As long as you are eligible, you can continue to contribute to your account tax-free and let the money grow tax-free for use at any time in the future, whether near or distant. For 2018, account owners can contribute up to $3,450 a year for individuals and $6,850 for families, with a $1,000 catch-up contribution available to those over 55.
Saving For Retirement
The obvious and typical use of an HSA is to pay for medical expenses as they occur. Many people, however, have turned their account from a current pay-as-you-go way of avoiding taxes on medical expenses to a lucrative retirement savings vehicle. They pay for current medical expenses out of pocket but maximize their HSA contributions and just let them grow for use during retirement.
It is no surprise that healthcare is often a major expense in retirement. The Employee Benefits Research Institute estimates that the average couple will need $265,000 to be 90% confident they will be able to take care of out-of-pocket medical expenses during retirement,2 and 41% of Americans are worried about how to pay for healthcare in their later years.3
Since medical costs are such a significant aspect of your retirement financial needs, it makes sense that an HSA can be used for retirement savings. Your HSA should not be your only retirement savings vehicle since funds are only tax-free for qualified medical expenses. But, when used in conjunction with IRAs and 401(k)s to pay for non-medical expenses, they can be a very powerful way to build your nest egg. After all, a HSA receives better tax treatment than any IRA or 401(k), whether traditional or Roth.
There is one caveat, though. In order to use a HSA for retirement savings, you need to make sure it is invested properly for long-term growth. Keeping HSA money in a traditional savings account earning .5% interest may be a good idea for those who are using the money for current expenses, but to do that for retirement savings would be to miss out on years and years of tax-free growth.
When setting up a Health Savings Account and deciding the best way to use it, it is important to work with a knowledgeable financial professional. If you would like to know more about Health Savings Accounts or have questions about the benefits of using your current HSA for retirement savings, we can help you evaluate your options. Schedule an appointment online to find out if an HSA is right for you.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.