Health Savings Accounts (HSA) have become commonplace since their slow start in 2003. According to the Employee Benefit Research Institute, the average account balance in 2018 (the latest published numbers) was $2,803 — and in 2020, the maximum deposit for a family headed by someone over the age of fifty-five could reach $8,100 per year.
If you participate in a Health Savings Account, though, you might want to reconsider how you use that money.
TrueNorth Wealth financial advisors local to the Salt Lake City area have advised many of our clients under the age of sixty-five to consider paying medical and dental expenses with their after-tax savings, leaving their HSA funds to grow for a later day. Here’s why: This approach takes advantage of the complete HSA “tax triple play”—pre-tax deposits, tax-free growth, and tax-exempt distributions for most healthcare expenses.*
Three major strategies allow for tax-free retrieval of these appreciated funds:
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If you save healthcare-related receipts throughout the life of the HSA, you can withdraw funds to match receipt amounts at any time, including after the age of sixty-five. Receipts will serve as IRS documentation in the case of an audit, so keep those receipts in a safe place for the long term! (You should also save receipts from all the medical payments you make from your savings in case you later need to get a reimbursement from your HSA.)
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Unlike what happens before you turn sixty-five, funds can be withdrawn after this age to pay for employee premiums of employer-sponsored health insurance if you postpone Medicare enrollment.
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Medicare also allows HSA funds to pay for most premiums after the age of sixty-five. The fund balance can be used to pay for Parts A, B, D, and any Medicare HMO premiums. A large account can provide years of tax-free money for these government insurance payments. If Medicare payments are withheld from your Social Security benefit, you can reimburse yourself from your HSA account.
Remember that qualified long-term care insurance premiums for the owner, a spouse, or dependents may be paid at any time through an HSA account.
A further strategy allows you to take out extra appreciated funds without a penalty for any reason after the age of sixty-five. You pay only the income tax on any funds you withdraw (similar to an IRA or other tax-deferred retirement plan).
There are three disadvantages to this strategy:
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Once you reach your sixty-fifth birthday, you can no longer contribute to your HSA account.
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MediGap or supplemental Medicare premiums are not eligible for HSA payments.
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At death, a spouse beneficiary can continue to withdraw tax-free from the account. However, if someone other than the spouse is the recipient of the HSA, the account and its remarkable tax benefits cease to exist upon the death of the original HSA owner. The entire inherited HSA amount is taxable to the beneficiary. If you own an HSA and designate someone other than your spouse as beneficiary (or your spouse beneficiary has a limited expected lifespan), you should prioritize HSA withdrawals or consider naming a charity as the beneficiary.
In conclusion, the Health Saving Account becomes a wonderful tax-free extended duration account you can use after the age of sixty-five for Medicare premiums, long-term care insurance, and numerous other healthcare expenses.
Please talk to one of our fee-based financial planners at TrueNorth Wealth, one of the best financial planning firms in Salt Lake City and beyond, soon to see how you can earn money and save on taxes with your HSA account.
*https://www.irs.gov/taxtopics/tc502
