We've written about the benefits of Health Savings Accounts before and continue to believe they are an excellent savings vehicle for many people. While their primary intention is to allow individuals to put money away pre-tax to pay medical expenses, they have some unique attributes that can make them a great long-term savings tool as well. We've recently teamed up with a company that will allow us to help you set up your own HSA and even invest your money in that account in a diversified mix of low cost mutual funds. Before we move on I should note that HSA's are not for everyone. Here are some of the criteria you should consider to see if an HSA might be right for you:
- You must have a high deductible health insurance plan. In 2016 and 2017 that means the deductible must be $1,300 for individual coverage or $2,600 for family coverage.
- You cannot be on Medicare since it is not a high deductible insurance plan.
- You should have sufficient liquid assets to cover any potential short-term spending needs or emergencies.
- You should already be maximizing your other retirement savings options - 401(k), 403(B), IRA, Roth IRA, etc. While some might argue the tax benefits of an HSA are so great you could start with HSA funding, you need to keep in mind you only maximize that benefit if you use withdrawals on qualified medical expenses. Not all your retirement expenses will be medical so you need to have sufficient savings in regular retirement accounts as well.
If you meet these criteria, you should be looking at putting money into an HSA to cover medical expenses now or in the future. The next question to ask is whether you should invest that money or just put it into cash or savings account. If you have sufficient cash flow to cover any medical expenses you might incur in the coming years, then you might want to start thinking about the HSA as a long-term rather than a short-term savings vehicle. This will help you maximize the "triple tax benefit" of an HSA:
- Contributions are tax-deductible.
- The earnings are not taxed.
- The distributions are not taxed, as long as they are used for qualified medical expenses.
In other words, they are a combination of the best attributes of the various other retirement savings accounts available to you. Unfortunately most of the major brokerage firms (like Schwab, Vanguard, etc) do not offer the option to open up an HSA. Up until now most of our clients who have them have only been able to put this money away into a cash or savings account. Now, through a company called Health Savings Administrators our clients are able to open an HSA and invest any contributions. We found this company through a contact at Vanguard, have thoroughly vetted them and feel confident using them for this purpose.
The next question you might ask is, "What will it cost to set up an HSA through this company?" They charge a $45 annual administrative fee and 0.25% of the total assets under management, which is quite reasonable. So if you have $5,000 in an HSA with them, you'll pay $45 + $12.50 = $57.50 per year. Of course the underlying mutual funds also have expenses, but we've chosen a lineup of low cost options from Vanguard and Dimensional Fund Advisors, so your all-in costs will still be very low.
We will not charge any additional fee ourselves nor are we compensated in any way by Health Savings Administrators. We have chosen to team up with this company only so that we can help our clients maximize their saving options and to make it easier for us to provide advice to you. By signing up through our connection, we'll be able to help you choose an appropriate allocation to the various funds and will be able to easily include this account in the overall financial planning and investment monitoring we provide.
Health Savings Accounts have been in the news a lot lately and you'll likely be hearing about them a lot more in the coming months as Congress works on changes to the Affordable Care Act. As this recent NY Times article points out, many Republicans are looking at HSA's as a way to help more people save for their medical care. There are some proposals out there that would make them even more enticing as a savings vehicle, so don't expect them to go away anytime soon.
We are also often asked what happens to an HSA after you die. As with retirement accounts, it depends on who you name as the beneficiary on the account. If you name your spouse as beneficiary, the account will remain an HSA and be subject to the same rules as it was for you. However, if anyone else is named the beneficiary, the account is distributed at your death and the proceeds would be taxable to the beneficiary.
Keep in mind you can contribute to an HSA and have it count for the current tax year up through April 15th of the following year. That means you have until April 15, 2017 to make a contribution for 2016. The maximum contribution amounts for 2016 are $3,350 for individual coverage or $6,750 for family coverage. If you are over age 55 you can contribute an additional $1,000.
If you have other questions about opening up an HSA or if you think you might want to do so for yourself, feel free to contact me anytime at firstname.lastname@example.org or 410-494-6680.
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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