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Health Savings Accounts: Are They Just What the Doctor Ordered?


Many individual are concerned about the high cost of medical insurance premiums and how to pay for escalating medical expenses. It is estimated that a couple retiring in 2018, both age 65, should expect to spend out of pocket an estimated $280,000*  on health care for their estimated lifetime. One possible solution to plan for the high cost of health insurance in retirement is to take advantage of a Health Savings Account.

How Do I Qualify?

The Medicare Modernization Act of 2003 created the Health Savings Account (HSA). A HSA is a savings vehicle with special tax advantages that is used in conjunction with a high deductible health plan (HDHP). A HDHP is a medical plan which has a minimum annual deductible in 2019 of $1,350 for individuals (family $2,700) and a maximum out of pocket of $6,750 for individuals (family $13,500). The HDHP is able to offer preventative care such as annual physicals not subject to the deductible. Also the individual cannot be covered by any other health plan and cannot be claimed as a dependent on another person’s tax return. HDHPs are attractive because they have lower premiums than traditional health insurance. The premiums are lower because you are paying for first dollar coverage out of your pocket. Also, you will take on more responsibility because you may need to research costs when paying out of pocket expenses with your “own” money.

How Does an HSA Work?

HSAs are portable, meaning it stays with you if you change employers or leave the work force. You can use your account to pay for current qualified medical expenses, or keep it in the account for future medical expenses.  The contributions are tax deductible and can be made by employee, employer or family members.  Like in horse racing, the trifecta is when you pick three horses to win in the exact order.  The HSA is the trifecta of the investing world, contributions are tax deductible, it grows tax deferred and distribution for qualified medical expenses are tax free.

What are Qualified Medical Expenses?

IRS Publication 502 contains a list of allowable expenses which includes dental care, chiropractic care , deductibles, co pays , capital expenses to increase medical access to a home, to name a few.  Although you cannot use the funds to pay regular health insurance premiums, you can use it to pay for COBRA, Medicare Part B and Part D and qualified long term care (limits apply).

How can an HSA Help You Save on Taxes?

Contribution limits for 2019 are $3,500 for individuals and $7,000 for family. There is a special catch up for insured over the age 55 of $1,000 for individuals. So, a family with two individuals both over the age of 55 could max out their total contribution to $9,000. Any amount that your employer or family member adds to your HSA is deducted from your total eligible contribution limit.  You can claim a tax deduction even if you do not itemize your deduction on Schedule A. Your contributions can be made up to April 15th of the following tax year.

There is a 20% penalty plus income tax due on any distribution that is not made to pay for a qualifying medical expense prior to the age of 65. Over the age of 65 there is no penalty, but you would pay income tax on non-qualified medical expenses.

Should I save in my 401k or HSA?

When considering how to save for retirement there are more options available than traditional retirement plans.  While Health Savings Accounts and 401(k) plans have some things in common, there are also differences that most individuals are not aware of.  Both plan types allow you to contribute pre-tax dollars from salary deferral and allow you to save towards expenses during your retirement.  401(k) plans allow you to defer $18,500 (2018) of your salary ($24,500 at age 50 as a catch-up contribution).  Retirement plans allow for penalty withdrawals at age 59 ½ although they are still subject to ordinary income.  While withdrawals from HSA’s have penalty free withdrawals at age 65, those withdrawals will not be subject to taxation if used for qualified medical expenses.

HSA rules allow for funds to carry over indefinitely with the triple tax-free benefit of funds going in tax-free, growing tax-free and coming out tax-free as long as they are used for qualified medical expenses. Unlike 401K distributions, where depending on your age and the plan provisions you may have an IRS penalty when withdrawing the funds and any withdrawal will be taxed at your ordinary income rate.

HSA contributions made from payroll deductions are truly pre-tax in that Medicare and Social Security taxes are not withheld on those deductions.  In contrast to pre-tax 401(k) contributions which are subject to both Medicare and Social Security tax.  Both pre-tax 401(k) contributions and HSA payroll contributions are not subject to state or Federal income tax. 

There are no requirements to take minimum distributions at age 70 ½ from HSA accounts as there are on 401(k) plans, (although those distributions may differ according to the plan document and if you are a 5% owner of a company) and IRA accounts.  Any unused balance in an HSA can be passed on to a spouse and the spouse can continue to enjoy the same tax-free use of the account for qualified medical expenses.

There is a tax rule that allows for a one-time tax-free transfer of funds from your IRA to an HSA. This is not like a rollover as it counts toward your annual HSA contribution limit. It does allow you to move a small amount of money from an IRA where you would have to pay taxes on withdrawals needed for medical expenses to the HSA where withdrawals for such purposes would be tax-free.

If we lived in a perfect world, you would fund your 401k and HSA to the fullest amount each year.  If you are faced with limited dollars to defer, it pays to analyze your options regarding your own personal situation to maximize your tax saving and retirement dollars.  After you do your analysis, maybe the HAS is just what the doctor ordered.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Marcum Financial Services is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Any opinions are those of Tim Neuville and not necessarily those of RJFS or Raymond James.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.


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Marcum Financial Services is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Member FINRA / SIPC. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc. and Marcum Financial Services, LLC.


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