What Is a Health Savings Account?Oct 25, 2021 09:16AM ● By Griggers Wealth Management
Healthcare is one of the biggest expenses in retirement, yet many people fail to save specifically for healthcare. One way to help you save for the high cost of medical expenses in retirement is through a Health Savings Account. A Health Savings Account or HSA is a tax-favored account set up to pay certain medical expenses of the account owner, spouse, and any dependents.
To qualify for an HSA, you must be enrolled in a high-deductible health plan (a health plan meeting certain deductibles and out-of-pocket expenses). In 2021, the minimum deductible is $1,400 for an individual and $2,800 for a family. The maximum out-of-pocket expenses is $7,000 for individual and $14,000 for families.
The big advantage of HSA’s is contributions are tax deductible, grow tax deferred, and are tax free when the funds are withdrawn for qualified medical expenses. The maximum contribution for 2021 is $3,600 for individuals and $7,200 for a family. If an individual is age 55 and older, they may make an additional catch-up contribution of $1,000 dollars per year. Once an individual turns 65 years old, they may no longer make contributions to their HSA. A 6% excise tax is imposed on over-contributions.
If HSA distributions are made for qualifying medical expenses, they are not taxed. However, if they are not used for qualifying medical expenses, the distribution will be taxed at ordinary income rates. If the unqualified distribution is made while under the age of 65 there is an additional 20% penalty.
For someone who does not have many out-of-pocket medical expenses, an HSA can be a great supplement to retirement savings due to its triple tax advantage. If used correctly, an HSA could create a way to pay your medical expenses tax-free in retirement. Instead of pulling from your retirement accounts, the HSA withdrawals could save you thousands of dollars in taxes in retirement. Before considering a high deductible health plan, you should evaluate your medical needs to make sure it is the appropriate health plan for you and your family.
Louis DeVicaris, CFP
Louis DeVicaris, CFP
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.