With the Affordable Care Act becoming effective in 2014, healthcare seems to be top of mind with a lot of people. But there are still many kinks to be worked out and many questions left unanswered. In a world of uncertainty, why not consider utilizing a savings vehicle to help with medical costs that you can control?
Using an HSA
A Health Savings Account, or HSA, is a fairly new type of account that is available to those who are enrolled in a high deductible health care plan. Many confuse an HSA with a Flex Spending Account or FSA – don’t make that mistake! A Health Savings Account is typically much more flexible and allows you to roll any unused funds over year to year, something a Flex Spending Account does not offer – it is a “use it or lose it” plan.
What an HSA Can Cover
Many employers who offer high deductible plans will often contribute a certain amount to the employee’s HSA each year as an added benefit, somewhat like a 401k match. Dollars contributed to the account are pre-tax and earnings accumulate tax deferred. Funds withdrawn, if used for qualified medical expenses (including earnings), are tax-free. The list of qualified medical expenses can be found at irs.gov, however, just to give you an idea, a few include: expenses to cover your deductible (not premiums), co-payments, prescription drugs, various dental and vision care expenses, etc. As always, consult with your financial advisor, tax advisor and health savings account institution to verify what expenses are considered qualified. If you make a withdrawal that is considered “non-qualified”, you will be subject to taxes and a 20% penalty on the withdrawal amount.
Here are the details for 2014:
Individuals
Must have a plan with a minimum deductible of $1,250
$3,300 contribution limit ($1,000 catch-up contribution if 55 or older)
Maximum out-of-pocket expenses cannot exceed $6,350
Family
Must have a plan with a minimum deductible of $2,500
$6,550 contribution limit ($1,000 catch-up contribution if 55 or older)
Maximum out-of-pocket expenses cannot exceed $12,700
Withdrawing from an HSA
Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA. However, once you are 65, funds can be withdrawn for any purpose, medical related or not, and you will no longer be subject to the 20% penalty. However, the withdrawal will be included in taxable income, like an IRA or 401k distribution. This can present a great planning opportunity for clients who may want to defer additional money but have already maximized their 401k plans or IRAs for the year. Although you have to wait 5 ½ years longer to access the funds from a HSA than a traditional retirement plan (age 59 ½) to avoid penalty, this is just another investment vehicle that could reduce taxable income in the year contributions were made while earnings have the opportunity to grow tax-deferred and tax free.
As you can see, a Health Savings Account can be a great addition to an overall financial plan and should be considered if you are covered under a high deductible health plan. No one likes medical expenses; this can be a vehicle that can potentially soften of medical expenses.
Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.
Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. #C13-002464
