healthcare

Is a Health Savings Account Right for You?

healthcare

Q: What is a health savings account?

A: A health savings account (HSA) is a tax-advantaged medical savings account for people who are enrolled in a high-deductible health plan (HDHP). For this purpose (for the 2015 tax year), an HDHP must have a minimum deductible of $1,300 for individuals or $2,600 for families. The maximum out-of-pocket expenses for 2015 are $6,450 for singles and $12,900 for families.

Q: What are the tax advantages of an HSA?

A: When used for its intended purpose of health care expenditures, an HSA carries the tax advantages of both a traditional and a Roth IRA. Specifically, contributions to an HSA are tax-deductible with respect to both federal and state taxes (except for Alabama, California, and New Jersey), earnings and realized gains are not taxed (except for New Hampshire and Tennessee), and distributions are tax-free. If, however, the distributions are used for non-health-related expenses, then they are taxable as marginal income, similar to a traditional IRA. Furthermore, if the distributions are taken before age 65, the IRS will impose a 20% penalty, except in the case of disability.

Q: How much can I contribute to an HSA?

A: The limits on contributions to an HSA for 2014 are $3,300 for individuals and $6,550 for families (the deadline for 2014 contributions is 4/15/2015). For 2015, they increase to $3,350 for individuals and $6,650 for families. In both years, a $1,000 catch-up contribution is allowed for those who are age 55 or older.

Q: What happens to my HSA once I become eligible for Medicare?

A: People who are covered under Medicare can no longer make contributions to their HSA, but they can use withdrawals to pay Medicare premiums as well as health-related expenses not covered by Medicare.

Q: Can I roll the money from my IRA into my HSA?

A: Yes. You can make a one-time contribution rollover from your IRA into your HSA. However, you can’t roll money into your IRA from your HSA. Any rollover contributions will count toward the maximum annual contribution limits.

Q: What is the underlying rationale behind HSA’s?

A: Two of the underlying principles of the HSA/HDHP combination are that individuals should have full control over choosing their health care providers and that insurance should be used only for expenses above and beyond the ordinary. High premium health insurance plans with low deductibles essentially act as prepayment or reimbursement vehicles, leading healthy people to question their value, and once the healthy people exit the plan, the remaining unhealthy people force the insurer to raise premiums, perpetuating a vicious cycle. Perhaps the most important principle of an HSA is that individuals own the funds that are set aside for healthcare, and if they make a concerted effort to stay healthy, then they should eventually have the option to use those funds for whatever purpose they desire.

Q: Is an HSA right for me?

 A: If you are pre-Medicare and in good health and intend to stay that way, an HSA is a compelling alternative, assuming your employer offers a health plan that accommodates it. If you are self-employed, please consult your insurance agent/broker/expert to find a plan that is HSA compatible. The value provided by an HSA is directly proportional to your marginal tax rate.

Q: Is there a particular HSA provider I should consider?

A: We have identified one provider (HSA Bank) that offers a good alternative for managing investments held in an HSA. Specifically, they allow you to put your funds into a TDAmeritrade brokerage account where you can buy and sell any investment vehicle under the sun. Of course, we advise you to limit yourself to a low risk portfolio of index funds (or a single fund of index funds) but with enough cash set aside to pay for that year’s anticipated health-related expenses. If you work with a registered investment advisor who custodies assets at TDAmeritrade such as Index Fund Advisors, then that advisor can manage the account on your behalf via a limited power of attorney.

If you would like to speak to one of IFA’s wealth advisors about an HSA or any other financial concern you may have, please give us a call at 888-643-3133.