With health care costs on the rise, will you be able to keep up?
Our health and the cost of health care are some of the greatest risks to building and maintaining wealth in this generation. Medical debt accounts for more bankruptcies than any other financial event. Moreover, according to recent data from the Social Security Administration, a married couple has a greater than 50% chance of at least one partner living until age 90. As the trend of increasing life expectancy continues, the importance of saving wisely and thinking (very) long-term magnifies.
When I meet with people that have employer-provided health care, many of them elect to purchase a High Deductible Healthcare Plan (HDHP). A HDHP is a health care plan that typically has lower monthly premiums, but passes a substantial amount of risk onto the policyholder to maintain good health. One of the benefits of a HDHP is the potential eligibility to save money in a Health Savings Account, or HSA. When I ask about how they believe their HSA works, most look at me confused, either confessing that they know very little about it or that they believe it is just a savings account for their health expenses. And while it is true that the account is designed for health expenses, its benefits are far greater than that surface level of value.
In spite of its name, a Health Savings Account does not just have to be a savings account like a bank. In fact, there are several different earning and savings options available in HSA’s beyond what a traditional savings account offers. There are a number of providers of HSA’s that allow your money to be invested in stocks and mutual funds. This allows your money to be invested in accordance with your financial goals over time. Contributions made by you are tax-deductible, and withdrawals are tax-free for qualified medical expenses (this by the way does not include paying for health care premiums, so do be careful about this). Additionally, contributions are not just restricted to yourself – anyone can contribute to your HSA, although they won’t receive any tax benefit for doing so. Moreover, the growth of the investments of the account as well as any capital gains or dividends are also untaxed. Similar to an IRA, at age 55 you can make an additional $1,000 “catch-up” contribution annually to the account, and at age 65 you can withdraw money from the account for any reason without incurring a tax penalty. Yes, this means that a HSA acts not only as a current healthcare savings vehicle, but has duality as another tax-advantaged vehicle for any expenses later in your life. However, there are also some restrictions and downsides to be aware of. As mentioned before, you can withdraw the money at age 65 for any reason, but it will be treated as ordinary income if you withdraw it for a non-qualified retirement expense. But if you are younger than 65, unless you meet certain other qualifying conditions you will not only pay ordinary income taxes on the withdrawal but may be subject to an additional 20% tax penalty if it is not a qualified medical expense. Additionally, if you die and the account’s beneficiary is not a spouse, the inherited amount is treated as ordinary income. This may leave your loved ones with far less money than you may have intended them to have. Finally, HSA’s can have hidden and expensive fees embedded in their client agreements. These may include fees for usage of the debit card, as well as monthly and/or annual fees to the custodian just to have the account. You need to be aware of these costs before deciding whether a particular HSA is a good fit for you.
Health Savings accounts have some strong potential benefits both short and long-term for account holders. But given the restrictions and penalties in place, it is important to make sure you are prepared to make contributions. Paying down high-interest debt, having a strong emergency savings fund, and taking advantage of employer retirement benefits are some of the first steps you should consider in making a decision about where a HSA fits in your financial profile. By removing risks that could force you to withdraw from the account early, a HSA can be an important and valuable health savings and retirement vehicle for you. Finally, I cannot stress enough that you seek the advice of a qualified tax professional and/or financial advisor to review your individual situation and help you determine if this is a right fit for you. This article is for informational purposes only, and is not to be construed as a recommendation of any product or service.
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