In terms of saving for retirement, you most likely know that 401(okay)s and particular person retirement accounts supply loads of benefits. Hopefully, you’re even contributing to such retirement plans already. However a lesser-known selection for retirement financial savings — the well being financial savings account (HSA) — packs in even greater advantages that you just don’t wish to miss, if the choice is obtainable to you.
“A well being financial savings account is the one one that gives a triple tax break,” mentioned Vid Ponnapalli, a CERTIFIED FINANCIAL PLANNER® skilled and founding father of Distinctive Monetary Advisors, based mostly in Holmdel, N.J. “That’s the fantastic thing about HSAs.”
What’s a well being financial savings account?
Simply because the identify implies, an HSA is an account designed particularly to encourage individuals to save lots of for well being care prices. Once you use your HSA funds to cowl certified medical bills, the withdrawals are tax-free — and that’s simply one of many tax advantages of the account. (Extra on that later.) And whereas they’re nonetheless comparatively new, first provided in 2003 (the 401(okay) was born in 1978), they’re quickly gaining in recognition: On the finish of 2018, the variety of HSAs crossed the 25 million mark and held $53.eight billion in belongings, in response to monetary agency Devenir, which focuses on well being financial savings accounts.
To hitch the rising plenty and contribute to at least one, you must first have a high-deductible well being care plan (HDHP), which comes with a decrease month-to-month premium and a excessive deductible (once more, simply because the identify implies).
In 2019, for a plan to be thought-about an HDHP, as decided by the IRS, the minimal deductible is $1,350 for people, and the out-of-pocket most — which incorporates deductibles, co-payments, and co-insurance — is $6,750 for people. For households, the minimal deductible $2,700, and the out-of-pocket most is $13,500. In 2020, the minimal deductible for an HSA-compatible well being plan rises to $1,400 and the out-of-pocket most to $6,900 for people whereas the minimal deductible is $2,800 and the out-of-pocket most is $13,800.
For well being financial savings accounts, the IRS-set contribution restrict in 2019 is $three,500 for people and $7,000 for households. Plus, you possibly can add one other $1,000, for those who’re 55 or older by the top of the yr. In 2020, these contribution limits enhance to $three,550 for people and $7,100 for households.
The triple tax benefits of HSAs
Again to the piès de résistance, the massive promoting level for HSAs is their tax-break hat trick:
You save on taxes when placing cash into the account. Both your employer instantly deposits the pre-tax cash into the HSA earlier than you even get to see it in your paycheck. Or you possibly can deduct the quantity you’ve contributed out of your gross revenue your self, reducing your taxable revenue and in the end your tax invoice.
You’ll be able to make investments the cash inside your HSA, identical to with a retirement account. And any features, curiosity, or dividends your funds earn is tax-free.
So long as the cash is used for qualifying medical bills, your distributions additionally come out tax- free.
What counts as a certified medical expense? On the whole, something essential to diagnose, treatment, mitigate, deal with, or forestall a illness for your self, your partner, and any dependents. That features deductibles, co-pays, and co-insurance, together with something not lined by your plan, corresponding to visits to out-of-network docs and imaginative and prescient and dental care. It doesn’t embody insurance coverage premiums or non-prescription medicines. However you need to use the cash to pay for all Medicare premiums, apart from Medigap, when you qualify for Medicare at age 65. IRS Publication 502 covers all of the nitty-gritty of what qualifies.
And also you wish to be certain you get that proper. Withdrawals made for something that’s not a certified medical expense will get hit with a heavy 20% penalty, on high of being taxed as common revenue.
Is an HSA higher than different office retirement plans?
After all, a well being financial savings account isn’t by definition supposed for retirement financial savings like a 401(okay) or IRA. And with such low contribution limits, it’s not going to chop it as your sole retirement financial savings account. However that triple tax break means you need to contemplate filling up your HSA earlier than maxing out your 401(okay) contributions.
Plus, you possibly can let your HSA cash develop — tax-free — indefinitely. With a standard 401(okay), when you flip 70½, it’s important to take required minimal distributions (RMDs), that are taxed. “In that sense, an HSA presents absolutely tax-free alternatives, whereas a 401(okay) presents tax-deferring alternatives,” Ponnapalli says.
However this isn’t an either-or scenario. You should utilize each an HSA and a 401(okay) (and an IRA, brokerage account and a plethora of different monetary instruments) to make sure you can afford the retirement of your goals. Many specialists advocate maxing out your HSA contributions, solely after contributing sufficient to your 401(okay) to seize any employer match. “It will get tough with that,” Ponnapalli says. “You need to weigh the advantages of the free cash versus the tax-free withdrawal of the HSA.”
So, in case your employer presents to match your 401(okay) contributions, as much as 6% of your revenue, you usually first wish to ensure you get that match due to the free cash out there. Then, you possibly can prioritize saving in your HSA earlier than including extra money to your 401(okay). However, Ponnapalli suggests, the tax advantages of an HSA would possibly even outweigh the lure of free cash, relying in your revenue and different elements. A monetary skilled may help you crunch these numbers and resolve what technique would work finest for you.
Is a well being financial savings account best for you?
However earlier than you even get to that time, it’s important to resolve whether or not an HDHP plan, which you want with a view to contribute to an HSA in any respect, is suitable for you. For instance, when you’ve got well being points that require plenty of expensive medical consideration, together with docs visits and medicines, an HDHP may wind up costing you a large number out-of-pocket and never be worthwhile.
One other challenge to consider: “Decrease earners might not profit from the tax financial savings sufficient to justify prioritizing the HSA over different retirement account choices,” says Taylor Schulte, a San Diego-based CFP® and host of the Keep Rich Retirement podcast. “It’s necessary to work along with your tax preparer and trusted advisor to find out your finest technique.”
Stacy Rapacon is a contract author whose work might be discovered on Kiplinger.com, U.S. Information and World Report, CNBC and different on-line and print publications. You could find her on Twitter at @srapacon and join along with her on LinkedIn. Opinions are her personal.
Haven Time period is a Time period Life Insurance coverage Coverage (DTC 042017 [OK1] and ICC17DTC in sure states, together with NC) issued by Massachusetts Mutual Life Insurance coverage Firm (MassMutual), Springfield, MA 01111-0001 and provided solely via Haven Life Insurance coverage Company, LLC. Coverage and rider kind numbers and options might fluctuate by state and might not be out there in all states. In NY, Haven Time period is DTC-NY 1017. In CA, Haven Time period is DTC-CA 042017. Our Company license quantity in California is OK71922 and in Arkansas, 100139527.