Dear Savvy Senior: What can you tell me about health savings accounts? I’ve heard they are a great investment to help with growing health care costs when I retire. — Planning Ahead
Dear Planning: A health savings account is a fantastic financial tool to help you build up a tax-free stash of money for medical expenses now and after you retire — but to get one, you must have a high-deductible health insurance policy.
Health savings accounts have become increasingly popular over the past few years.
The benefit of this account is the triple tax advantage that it offers: Your contributions can be deducted pretax from your paycheck, lowering your taxable income; the money in the account grows tax-free; and if you use the money for eligible medical expenses, withdrawals are tax-free. If you change jobs, the account moves with you.
To qualify, you must have a health insurance policy with a deductible of at least $1,350 for an individual or $2,700 for a family.
This year, you can contribute up to $3,450 if you have single health insurance coverage, or up to $6,900 for family coverage. Next year, you can contribute slightly more — up to $3,500 for single coverage or up to $7,000 for family coverage. And people age 55 and older can put away an extra $1,000 each year. But you cannot make contributions after you sign up for Medicare.
The money can be used for out-of-pocket medical expenses, including deductibles, co-payments, Medicare premiums, prescription drugs, vision and dental care and other expenses (see IRS.gov/pub/irs-pdf/p502.pdf) now or when you retire for yourself and your spouse as well as your dependents.
Unused funds roll over year to year and continue to grow tax-free in your account. You’ll get a bigger tax benefit if you use other cash for current medical expenses and keep the account money growing. Be sure to hold on to your receipts for medical expenses, even if you pay those bills with cash, so you can claim the expenses later. There’s no time limit for withdrawing the money tax-free for eligible medical expenses.
If you do use your funds for non-medical expenses, you’ll be required to pay taxes on the withdrawal, plus a 20 percent penalty. The penalty, however, is waived for those 65 and older, but you’ll still pay income tax on withdrawals not used for eligible expenses.
Check with your employer to see if this account is offered, or open an account through banks, brokerage firms and other financial institutions.
If you plan to keep the money growing for the future, look for an administrator that offers a portfolio of mutual funds for long-term investing and has low fees. Health Equity, OptumBank, The HSA Authority and Bank of America are the top ranked providers for long-term investing according to the investment research firm Morningstar. To search for providers, visit HSAsearch.com.
After setting up your plan, contribute funds by transferring from your bank, sending checks or setting up a payroll deduction. To access your funds many plans provide a debit card, some offer a checkbook and most allow for reimbursement.