Health Saving Account(HSA)-  Retirement tax saving tool better than Roth and IRA

August 29, 2017

A health savings account (HSA) is a trust account into which qualified taxpayers can make tax-deductible contributions. Does it have anything to do with retirement saving?

 

HSA account has complex rules and is often ignored or misused by many taxpayers. Let me "decode" the complexity of the rules for you:

 

Contributions 

 

Contributions to the HSA  are pre-taxed by employers or tax-deductible by employees up to $3,400 for single coverage and $6,750 for family coverage a year. ($1,000 additional over 55 years old.) Unlike IRA, there are no phase-out rules for high-income taxpayers.

 

Eligibility

 

You need to be covered by a high-deductible health plan (HDHP). In 2017, the minimum annual deductible of a qualified HSA plan for an individual is $1,300 and $2,600 for a family.

 

Tax-free distributions

 

Distributions are tax-free when used for qualified medical expenses.   Generally, If the expenses are allowable as a medical deduction on your tax return, they are qualified medical expenses for HSA purpose.  See IRS Publications 502  for details.  Generally you can't use HSA to pay the insurance premium; however, you can use it for qualified long-term care insurance;  health insurance while you are receiving federal or state unemployment compensation;  premium under COBRA,  or Medicare premiums.

 

Tax-Free investment earnings

 

Tax-Free investment earnings and compounding on HSA balance. Any investment allowed for IRAs is permitted for HSAs.

 

Portable and Rollable

 

Unused contributions rollover year to year unlike FSA, which you lose if you don't use. If you change jobs or become unemployed,  HSA stays with you. You can reimburse yourself for medical expenses in any prior years, and  there is no time limit!! 

 

Superior IRA after 65

 

Act as a superior IRA after 65.  At age 65(or if disabled or death), the funds can be used as a retirement plan. Withdraw for non-medical use will be taxed with no penalty. Better yet,  there are no required minimum distribution requirements like IRA. 

 

Due to the constant increase in the health care costs, high-deductible health plans (HDHP) have become increasingly popular.  More people are eligible for HSA.  However, most of the HSA account owners only use HSA account same way as a flexible saving account(FSA) to reimburse their current year medical expenses. Many people don't contribute to it simply because they currently have minimum medical expenses. 

 

I would strongly encourage you to look at HSA as a long-term tax-advantaged investment account as well as a medical saving account.  For high-net-worth people, one strategy is to make the maximum contribution to an HSA account with the low fee and good investment choices, save the medical expense receipts and let it grow tax-free. You can reimburse yourself even decades later after the balances double or triple for free. You get yourself a deductible Roth account. For people we do not have enough medical expenses, you can still contribute to maximum HSA and withdraw after 65 years old. By doing so, you increased your deductible IRA annual limit. 

Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.

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CPA San Jose, CPA San Francisco  

T: 888-388-1422

T: 415-704-8989

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