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Healthcare, Tax Savings and Knee Buckling Curveballs

Insights

Want to save meaningful tax dollars on healthcare?  If so, you may want to consider an HSA, or Health Savings account.   HSAs have grown in popularity in recent years and, when properly utilized, may allow you to pay for medical expenses now and in the future with pretax dollars. An HSA can be a valuable tool in paying for unplanned medical bills, as it did in my case earlier this year when my daughter was diagnosed with cancer. And if you don’t have an immediate need, an HSA can be used as an additional source of retirement savings.    

Am I Eligible for an HSA?

The first critical point to understand is that you must be enrolled in a qualified high deductible health plan (HDHP) to have an HSA. The definition of qualified is outlined by the IRS and not all high deductible plans meet the qualified definition, so be careful. And no, unlike an FSA, or Flexible Spending Account, an HSA isn’t a “use it or lose it” account. Any unused balances roll over year to year, giving you a real opportunity for investing. 

In 2019, there are minimum out of pocket deductible thresholds of $1,350 for individual plans and $2,700 for family high deductible plans.  There are also maximum out of pocket thresholds of $6,750 and $13,500 respectively. These limits may change in the future and other limitations may apply, so you need proper, professional guidance in this area.

What Are My Tax Savings and What Can I Do with Them?

Now that we have a general idea of who may be eligible, let’s take a look at what type of tax savings you might expect from utilizing an HSA.  First, you need to determine whether your plan is employer based or not.  For those that have the HSA contributions taken from their paychecks, you will save on federal, Social Security, Medicare and in most states, state income taxes. Sorry California and New Jersey residents...you don’t get those state income tax savings. Add it all up and this could mean savings of 25-50% on every dollar that you contribute to your plan. 

For those of you that contribute to a plan on an after-tax basis, you will not receive Social Security and Medicare tax savings at all. You will need to wait for your next tax filing to recognize your federal and state (if applicable) tax benefit savings. Still a win, minimally at the Federal level.

In either case, the maximum that you can put away annually would be $3,500 for individual plans and $7,000 for families.  Those age 55 and older can save an additional $1,000 or $2,000 when factoring in a spouse on a family plan.

Now that you have meaningful tax savings and typically lower monthly plan premiums due to the higher plan deductibles, you can stash money away and perhaps even receive additional contributions from your employer.  Many employers that subsidize medical insurance like the lower premiums that accompany an HSA-compatible plan and will match your contributions as an added bonus.

Once you have your HSA established and are funding it, what can you use the savings for?   You can only use the funds for qualified medical expenses. Qualified medical expenses include medical, dental and vision expenses, surgeries, prescription drugs and lab testing to name a few. A huge win is that you can also pay for qualified long term care insurance contract premiums.

You Never Know What Life Will Throw at You

On a personal note, I have been contributing bimonthly to my HSA since 2006, the year after my daughter, Megan, was born. We had switched to an HDHP that year and I decided that an HSA would be a good place to invest pre tax dollars, with the ultimate goal of using it to pay for long term care premiums for myself and my wife in the years to come. 

But sometimes life will throw you a curveball. This past May, Megan was diagnosed with retinoblastoma, a rare cancer of the retina. Fortunately, this type of cancer is 100% curable. This treatment, however, has involved many out-of-town doctor appointments, brain and orbit MRIs, numerous eye scans, several evaluations under anesthesia (EUAs) with injections and treatments, four rounds of chemotherapy and ultimately a retina repair. She is getting absolutely the best care available and as of today, she is 99% cancer free. 

Needless to say, Megan’s health care costs started to add up. This is where it is important to know what your health insurance will cover and how much you will have to pay out of pocket. Fortunately, we were able to pay the high deductible and out of pocket costs with our HSA, as all parts of her treatment were considered qualified medical expenses.  Our family was able to put our time and attention on my daughter, not on worrying about the health care bills that appeared in our mailbox.  

The triple benefit of HSAs for Retirement 

If you have the resources to pay for your medical expenses now with after-tax dollars, then you can reserve the HSA for retirement. The potential power of the HSA exceeds that of of IRAs, 401(k)s and even Roth IRAs when properly utilized. Keep in mind this tool can provide:

  • Tax savings on contributions 
  • Tax-free growth on your invested contributions 
  • Tax-free withdrawals 

As with any planning strategy, HSAs and HDHPs have their pros and cons.  This is not a one size fits all solution. However, the powerful tax savings on your contributions, the tax free growth on your invested contributions and the tax free withdrawals when utilized for qualified medical expenses could prove to be an invaluable tool while saving for today’s healthcare needs and those that will inevitably come our way in retirement.  There is a better path forward with proper planning. 


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