Health Savings Accounts are on the Rise Again

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Retirement is the prize at the end of years of hard work and a responsible financial strategy. Medical expenses, on the other hand, are virtual certainties that can happen suddenly and well before retirement age. Health savings accounts (HSAs) are becoming increasingly popular ways for individuals to prepare for healthcare concerns. HSAs distinguish themselves from other retirement account types by providing unique tax advantages, though you’re still able to explore the same alternative asset options. To make HSA contributions, an account holder must be enrolled in a high deductible health plan (HDHP). While other retirement accounts only benefit the holder, any spouses or dependents enrolled in the same HDHP are eligible for the same benefits as the HSA holder.

Like an IRA or 401(k), you may contribute to an HSA and allocate the funds toward your chosen investment strategy. Those with individual HSA accounts may contribute up to $3,500 for 2019, while those with family coverage may contribute up to $7,000. Account holders at or above the age of 55 may contribute up to an additional $1,000 per year. As with a pre-tax account, personal funds contributed to an HSA are tax-deferred up to the full amount. Employer contributions cannot be deferred, but they may be excluded from your gross income.

If you have a Traditional IRA, this may sound familiar from a tax advantage standpoint. So why contribute to an HSA instead of an IRA or 401(k)? Unlike standard retirement accounts, HSA funds may be distributed and applied toward qualified medical expenses without any tax liability, regardless of the holder’s age. Therefore, by making tax-deferred contributions and qualified tax-free distributions, you may cover medical expenses with little or no out-of-pocket money (including your deductible) and never have to pay taxes on the funds involved.

A qualified medical expenses doesn't need to be directly covered by an HSA distribution for the holder to retain a tax-free benefit. For instance, if your account is situated entirely in precious metals and you suddenly accrue a medical expense, you don’t necessarily need to liquidate your holdings to make a qualified HSA distribution. If your deductible is $2,500 and 1 oz. Gold American Eagle coins are valued at $1,250.00 per unit, you may distribute two such items in kind for a total distribution value of $2,500. You couldn't (in theory) bring the two coins to the hospital and pay your deductible with them, but you still wouldn't have to pay taxes because the distribution value matches the expense. It’s important to remember that the fair market valuation of assets distributed in kind probably won’t match your qualified medical expenses exactly. Review your options accordingly, and consider maintaining an available cash balance in your HSA for emergencies.

Per the IRS, qualified medical expenses include, but aren’t limited to:

  • Prescription medicines, or over-the-counter medicines for which you receive a prescription
  • Hospital or nursing services
  • Annual physical examinations
  • X-rays
  • Ambulance services
  • Insulin
  • Chiropractor services
  • Therapy/psychologist services
  • Rehabilitation equipment, such as crutches or wheelchairs
  • Insurance premiums, but only under specific conditions

Among non-qualified medical expenses are the following:

  • Over-the-counter medicine without a prescription
  • Cosmetic Surgery
  • Funeral expenses
  • Illegal treatments or procedures

As you can see, a broad range of common medical expenses can be addressed with an HSA. However, despite their rising popularity, these accounts may not be as utilized as other retirement account types. Some people may worry about the required HDHP, but may not understand that HSA distributions can cover deductibles. Anything beyond the deductible would presumably be covered by regular insurance. Others may have concerns about contributing to an HSA while also budgeting for the paycheck deductions involved with company-sponsored health plans. The additional contributions may impact your day-to-day finances, but the long-term tax advantages are certainly worth considering.

As with any self-directed retirement or savings strategy, evaluating your financial situation and performing as much due diligence as possible are always recommended before implementing an HSA investment strategy. For more information about HSAs and qualified medical expenses, please review IRS Publications 969 and 502. You may also contact our team at 877-742-1270 or with any questions or concerns.