You have probably heard the old adage that nothing in life is certain except death and taxes. You can probably also add rising health care costs to this short list as well.
According to the U.S. National Bureau of Labor Statistics, 94% of workers with a family during 2020 had to contribute an average $6,797 to their employer-provided medical plans. This is up from 88% in 2010 workers on average paid in $4,524. Put another way, these statistics work out to about a 50% increase in the employee’s burden of their families’ health care costs in just 10 years.
There are not many tax-advantaged ways to save money these days, especially for your future health care needs. A Health Savings Account (or HSA) could be one possible option for you.
What is an HSA?
An HSA is a type of savings and investment account available to people who 1.) have a high-deductible health plan, or HDHP, and 2.) are not enrolled in Medicare. For your medical plan to qualify as an HDHP in 2021, the plan’s annual deductible limit must be no less than $2,800 for families ($1,400 for individuals) and the limit for out-of-pocket expenses cannot exceed $14,000 ($7,000 for individuals).
An HSA provides you a way to save money in a tax-advantaged way for eligible health care expenses. In 2021, you can contribute up to $7,200 for families ($3,600 for individuals) to your HSA account.
What are the Benefits of an HSA?
There are a several potential advantages to investing in an HSA:
- Lower Taxes: Contributions made to an HSA are tax-deductible up to the limits noted above. In addition, any additional value accumulated in the account, such as capital gains and interest, are never taxed upon withdrawal if you use those withdrawals to pay for “qualified” medical expenses (IRS publication 502 provides a list of qualified medical expenses).
- No Income Limits: You can contribute the maximum amount noted above to an HSA regardless of your income level.
- Flexibility: You can keep your HSA account intact and take it with you even if you leave your employer (i.e., an HSA is “portable”). You also do not have to use the money that you contribute to your HSA in the same year as the contribution itself (unlike Flexible Savings Accounts, or FSAs, which are “use it or lose it” accounts).
- Retirement Plan Optionality: You can keep and use HSAs to supplement your retirement savings if you do not fully use the account value to pay for qualified health care costs. You have the option to hold your HSA account into your retirement years without being required to take a minimum distribution, or RMD (unlike an IRA, for example, which requires you take an RMD starting at age 72). Once 65 or older, you also have the option to withdraw money from an HSA without penalty for any purpose (i.e., not just qualified medical expenses). Withdrawals for anything besides qualified medical expenses, however, are still subject to income taxes at your then-income tax rate.
- Investment Growth Potential: HSAs also usually offer the ability to invest the account value in mutual funds to potentially help grow the value of the account over time.
- Employer Matches: Your employer may also contribute to your HSA plan, matching some percentage of your contribution level.
As you can see, HSAs offer a variety of valuable benefits. Talk to Modera Wealth Management if you are eligible to contribute to an HSA and would like to discuss how an HSA can be part of your overall health care savings and financial planning strategy.
About Us: Modera is proudly a fee-only and independently owned financial planning firm that acts as a fiduciary for our clients. We have built our organization to put our clients’ interests first.
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