The Medical IRA – Huh?
Since 2003, Health Savings Accounts (HSAs) have been available for those individuals covered by high deductible health plans; the primary benefit to participating in such a plan is to receive tax-preferred treatment for funds saved for medical expenses.
Similar to other medical reimbursement tools, a withdrawal from one’s HSA for qualifying medical expenses is done in a tax advantaged way, on a non-taxable basis.
Effective in 2020, a high deductible plan must have a Minimum Deductible amount of $1,400 for a covered individual; family coverage imposes a $2,800 Minimum Deductible.
For next year, one can annually contribute $3,550 for self-coverage, or $7,100 for family coverage. There is a catch up contribution amount of $1,000 if the participant is age 55 or older.
HOW IS IT DIFFERENT?
Many of us use our employer’s pretax, cafeteria plan to pay for our portion of monthly health insurance premiums; in addition, we set aside funds for out of pocket medical costs in what is known as an FSA (Flexible Spending Account). But, the FSA must be currently used; if any of these paycheck deductions are unspent, you’ll fall subject to the “use it or lose it” fate.
But, the HSA is an accumulator; funds in your account may remain there, indefinitely, for future, qualified medical expenses.
Many employer sponsored HSA plans have investment options, too.
THE PLANNING TAKEAWAY
The age old lesson surrounding retirement dedicated savings’ vehicles has been to feed it to the extent possible, invest it well and the asset will grow for your own later use or as a generational planning tool. The HSA is, or can be, akin to one’s retirement assets (IRAs and/or 401(k) plan); fund them as best you can and leave them alone.
HSAs have particular appeal to high income earners that can pay for out of pocket medical expenses with their own after tax dollars. Furthermore, those who are relatively healthy with minimal healthcare costs now will find this strategy as a great opportunity of adding to their balance sheet.
- With the near term appeal of lower premiums, the HSA could impose a burden for the deductible responsibility; do your best to forecast cash flow if a sudden, costly health related event were to surface.
- Portability is a feature and certainly a plus when determining if such a plan is suitable.
- Ineligible expenses would include insurance premiums, other than supplementary Medicare coverage or long term care insurance.
- After reaching age 65, funds may be withdrawn for anything; such distributions would naturally be subject to taxation, if used for non-medical purposes.
- A Medicare eligible individual who enrolls in that program cannot make contributions to their HSA.
Please consider and implement this strategy if you deem it worthwhile for you. Please call us if you would like to discuss it any further. We are here to advise and to consult with you about such meaningful strategies in order to enhance your financial picture.
Ken Stewart, CPA