Health Savings Accounts And Retirement Plans

46745969_sEach year I teach about a four-hour financial class to the graduating cadets at Massachusetts Maritime Academy. We talk about many things related to planning for their financial future, including how to pay for the rising cost of health insurance.
I explain to the cadets that when someone is offered a new job, salary is usually at the forefront of the conversation—how much does it pay? But with the rising cost of health care, and the relatively new laws requiring that everyone be covered by a qualified health care plan, the critical question is becoming, “What are the benefits?” Specifically, “What kind of health insurance is provided?”
While occasionally that question can be answered easily, often times the answer is more complicated and must involve some acronym or another. This is certainly the case with those people who have a health savings account (HSA) through their employer.
First, let’s start at the beginning. A health savings account is a tax-advantaged medical savings account available to taxpayers in the United States who participate in a high-deductible health care plan. The funds in an HSA can be used for any qualified medical expenses such as doctors’ visits and certain pharmacy costs, but as is the case with most tax-advantaged accounts, the devil (and angel) is in the details.
The individual’s contributions to that account are not subject to any federal taxes and, depending on your state’s laws, may not be subject to any state taxes either. Another benefit of an HSA is that there is no expiration date. You can use that money at any point in the future, unlike the money in health flexible spending accounts (available to those with a more traditional medical plan) which does not roll over from year to year. In other words, any HSA money not used during the year simply builds on itself each year, which can create a nice stash of cash for any of those qualified expenses you might encounter on a rainy day in the future.
In 2015, the maximum HSA annual contribution limit, as dictated by the IRS, is $3,350 for individuals or $6,650 for families. Of course, the rules are never that simple, so there is a caveat allowing individuals 55 or older to contribute an extra $1,000.
For those of you who might be thinking that HSAs are outside of the topic of conversation for Cutter Family Finance columns, I want you to consider this: using your HSA effectively can help to not only cover today’s out-of-pocket costs of health care, but also help manage other qualified medical expenses in the future, well into your retirement.
Employees with an HSA and a high-deductible health plan (HDHP)—I warned you about the acronyms—can stash away pre-tax dollars needed to meet the deductible through automatic payroll deductions. (Alternatively, after-tax dollars can be used to fund that plan, with a deduction taken on income taxes.) That money builds tax-free and can be withdrawn tax-free when you need to use it for qualified medical expenses. And the longer you let that money build in your HSA, the more tax -free dollars you will have waiting for you to use as your enter retirement and beyond.
So, if you have sufficient funds outside of your HSA, that you can use to cover those medical costs, you can leave the money in your HSA to grow tax-free for the future.
An HSA paired with an HDHP provides the opportunity to save for potentially catastrophic out-of-pocket expenses. (The fear of a serious illness or a pricey injury can easily keep someone up at night.) With a higher-deductible (lower premium) plan, you can direct those premium savings into an HSA to build up your safety net for both the expected and unexpected. At a minimum, a good plan is to stash away enough to cover the in-network deductible for the plan. Alternatively, with a more traditional low-deductible plan you can easily be paying $2,000-plus for coverage and services that you won’t ever need.
Some people are lucky enough to have employers contribute to their HSAs. Last year, over a quarter of all HSA contributions were from employers. Combined with employee contributions, the savings of accumulated contributions can go a long way to meeting any anticipated qualified medical expenses.
While the rules pertaining to employer contributions may differ from the rules pertaining to employee contributions, a common approach is to put the full annual employer contribution in an employee’s account as soon as he or she enrolls in the HDHP and open an HSA.
Folks, let me leave you with a few final thoughts that I leave the cadets at Massachusetts Maritime. Retirement planning goes beyond IRAs, 401(k)s and the other more traditional financial vehicles. Having a solid plan requires you to look at the big picture, and that means looking at all possible angles of saving for and income in retirement. There have never been more challenges to those that take building a retirement plan seriously. Make certain that you seek professionals that are retirement specialists and, most importantly, be vigilant and stay alert. You do deserve more.