Are you aware of the many planning aspects of HSAs? We’d like to share some of the more in-depth aspects with you here so you can get the most from your HSA. However, if you’re unfamiliar with HSAs or need a quick reminder about them and high-deductible health plans (HDHP), then we encourage you first to read our blog article: A New Perspective on Health Savings Accounts.
HSAs are more tax efficient than other retirement accounts.
HSA accounts are often referred to as “triple tax-exempt” because your contributions, earnings, and qualified withdrawals are not taxed. This triple tax-exempt nature of HSAs makes them more attractive than other retirement accounts that are only double tax-exempt, including 401(k)s, IRAs, and Roth IRAs.
Employee HSAs could be considered quadruple tax-exempt.
Additionally, if you’re an employee and make HSA contributions via payroll deduction, then you have an added benefit of avoiding FICA (Social Security and Medicare) and FUTA (unemployment) taxes on those contributions. Contributions to your 401(k) via payroll deductions don’t avoid these taxes.
Don’t use your HSA for current medical expenses and invest the funds.
In order to fully benefit from the triple or quadruple tax-exempt nature of an HSA, you’ll need to let the account grow. It’s important to leave your contributions in your HSA and to invest them for the most potential growth.
Note: This means you’ll need to pay for medical expenses out of pocket, which can get expensive when you have a high-deductible health plan (HDHP).
Save receipts for current medical expenses to reimburse yourself in the future.
There is no time limit for reimbursing yourself for qualified medical expenses, so you can reimburse yourself in the future—even 30 years from now—for expenses incurred today. You must keep records of these expenses, so it’s important to keep your receipts. You’ll have plenty of medical expenses in retirement, so saving receipts for small expenses may not be worth the effort. Consider saving receipts for larger current expenses.
Note: You can’t reimburse yourself for medical expenses incurred before the HSA account was established or for medical expenses deducted on Schedule A of your tax return as itemized deductions.
Maximize your catch-up contributions in a family HDHP.
You can make an annual $1,000 catch-up contribution to your HSA beginning at age 55. If you have a family HDHP or two separate HDHPs, then you can potentially make two catch-up contributions—one for each spouse who’s 55 or older if the catch-up contributions are made to each of their separate HSA accounts.
Note: Most family HDHPs are set up with one HSA account in the employee’s name. If the spouse doesn’t have their own HSA account, then they will need to open one in order to make their own catch-up contribution.
Contribute after you stop working and before you enroll in Medicare
Unlike an IRA or Roth IRA, you don’t need to have earned income to be able to contribute to your HSA. You can contribute to your HSA if you have an HDHP and haven’t yet enrolled in Medicare. If you retire before Medicare age, then you’ll need to either continue your coverage through your employer with COBRA or get individual coverage. If either of these coverages is an HDHP, then you can contribute to an HSA.
Note: You can’t contribute to an HSA once you enroll in Medicare because Medicare is not an HDHP. Enrollment in Medicare includes enrollment in any Medicare coverage—Parts A, B, C, D, or a Medigap plan.
Contribute tax-free funds from your IRA in a one-time rollover.
You can make a one-time rollover from your IRA to your HSA up to your contribution limit for the year. If you wait to perform this rollover until you’re age 55, you can rollover both the maximum annual contribution and your catch-up contribution. This rollover must be transferred directly from your IRA into your HSA in order to be tax-free.
Note: A good candidate for this rollover would be someone who has a large IRA and might already be looking for openings to convert some of their IRA to after-tax accounts, such as a Roth IRA.
Use your HSA to pay for certain insurance premiums.
You can use your HSA to pay for certain health insurance premiums that are considered qualified expenses, including long-term care insurance (subject to limits and restrictions), healthcare continuation such as COBRA, healthcare coverage while receiving unemployment benefits, and Medicare or other healthcare coverage at age 65. Premiums for a Medicare supplemental policy are not considered a qualified expense.
Note: The annual amount of qualified long-term care premiums is limited and based on your age, which ranges from $420 for those age 40 and younger to $5,270 for those age 71 and older. The long-term care policy must also meet certain requirements itself to be qualified.
Non-qualified withdrawals after age 65 aren’t penalized.
Withdrawals for qualified expenses for yourself, your spouse, and your dependents are not taxable and not subject to a penalty. Non-qualified withdrawals are subject to a 20% penalty and tax, but the 20% penalty no longer applies once you reach age 65. Non-qualified withdrawals after age 65 are taxable, making them comparable to IRA withdrawals. While you’ll lose the triple-tax exempt nature of an HSA, your contributions and growth were tax-free.
Note: If you must take taxable distributions and you aren’t yet 65, then consider distributing funds from an IRA before distributing funds from your HSA to avoid the 20% penalty. Keep in mind that there is a 10% penalty for IRA withdrawals prior to age 59 ½.
Qualified distributions for a deceased owner are non-taxable within one year of death.
If you pass away and your beneficiary is your spouse, then they can continue the HSA as their own. If the beneficiary is not your spouse, then the value of your HSA at the time of your death is distributed and deemed taxable income for them. However, your beneficiary can use the HSA to pay for your outstanding qualified expenses within one year of your death. Funds used for this purpose by a non-spouse beneficiary are excluded from the value of the account, thus lowering their taxable income.
Note: Discuss your outstanding qualified expenses with your beneficiary. They can only use the account to pay for your expenses after your death if they have the necessary information and records.
Getting the most out of your HSA can be difficult, especially while trying to do so over a long period of time. It’s important to integrate HSA planning into your overall financial goals and retirement plan. As financial advisors, we love to help our clients accomplish these things, so please reach out to us if you have any questions. We’re here to help!
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.
I work with clients to create plans for spending, saving, investment, taxes, insurance, estate, and all the other items that, if managed, can lead to financial security and peace of mind. Often, after all the planning, I get the question: What else can I do to help my financial situation? While a good plan can help mitigate the ups and downs of the markets and the economy, it still can lead many to feel like they have little control over their situation. This question often stems from a sense of not feeling totally in control of your financial situation because of volatile markets, the economy—and recently, a global pandemic.
One area I have started to introduce to my clients as a financial strategy is to consider doing an evaluation and plan for their physical and mental health. The estimated average healthcare costs for a couple in retirement is $285,000. This figure can include Medicare supplement premiums, deductibles, drugs, co-pays, dental, vision, counseling, and other care services. Over the past 30+ years as I have been working with clients, I have seen firsthand how these costs are becoming an increasing burden to retirees as inflation in the healthcare industry is very much outpacing increases in incomes.
For many, chronic conditions like high blood pressure, high cholesterol, diabetes, obesity, heart disease, and auto-immune diseases are a big burden physically, mentally, and financially. My story was typical of a lot of people I see. Busy family life, high pressure jobs, and the stresses of life slowly add up. Late in my 40’s, I was diagnosed with high blood pressure and started taking medication. I thought I was in pretty good shape and didn’t give it much thought as my mom had high blood pressure all her adult life, and I thought it was hereditary. As I got into my 50’s, my cholesterol and triglycerides started steadily increasing to unhealthy levels. Like many, I ignored the slow decay of my physical and mental health. Denial was strong. I would get flashes of trying to stem the aging “tide” but would eventually fall back to poor exercise and eating habits. There were always more important things to do than focusing on my health. Between feeling the aches and pains of nearing 60 years old and waking up to the knowledge of the effect my health would have on my retirement finances, I became acutely aware that I needed to seriously focus on my health. My motivation of wanting to feel better physically and mentally was boosted by the fact that I wanted to use my retirement savings for better things than healthcare costs.
In late 2018, I got to work. First, I did an inventory of my state of health. To do this, I consulted with professionals, gathered tools and health data, and did a deep dive into educating myself about nutrition and mental wellness. I also examined my consumption of food and alcohol, my utilization of exercise, and my stress levels and other facets of improving my emotional health. Second, I set aside feelings of ego, guilt, and pride to create a realistic road map to improving my health. One of the main things I learned right away is that there is no quick fix. To reverse years of poor habits and choices, it takes a long period of time. It definitely is a marathon and not a sprint, as to do it the right way involves lifestyle changes and not diets or boot camps.
I’m eating less with mostly plant-based meals, exercising consistently, and addressing the stresses I face on many fronts. It has been fabulous! My energy levels are much higher, and I have a much more positive attitude about life in general. For many years, I felt anxious about the state of my physical and mental health and that I couldn’t get the motivation to execute a good personal healthcare plan with consistency. I’m glad the added boost of seeing improved health as a financial strategy has motivated me to create and execute the beginnings of a sound personal health plan.
We all live with the genetic lottery, and predicting our future health is difficult, but it would be ridiculous for me not to do everything in my power to live healthily and potentially not spend my hard-earned money on healthcare. I encourage everyone to create and execute a health and wellness plan to feel great physically and mentally. It also is a good financial strategy.
What could be the cost of ignorance? For some mistakes it could be a couple of dollars; for others, it could run into hundreds or thousands of dollars every year. Not paying attention to your enrollment benefits falls under the latter.
Recent research indicates that more than half of employees spend 30 minutes or less reviewing their enrollment benefits and 93% of people make the same enrollment selection without evaluating their options. While it may be easy to re-enroll in the same options every year, I recommend grabbing a cup of coffee or a glass of wine and setting aside a couple of hours to consider your options thoroughly. With the open enrollment deadline approaching soon for many, consider this essential advice to help you take full advantage of your employer benefits.
Medical, Dental & Vision
Many employers offer different medical plans to choose from. With insurance premiums, deductibles, and out-of-pocket costs on the rise, it’s crucial to evaluate your choices every year and make sure your plan still makes sense for you. If your spouse has coverage that will cover you or your dependents, don’t forget to compare these options with your employer’s plans as well.
It’s common for risk-averse people to choose a plan with a higher monthly premium in order to have a lower deductible and out-of-pocket maximum, but this isn’t always wise. If you are young or in good health, selecting a high-deductible plan and bolstering your emergency cash reserve by at least the amount of your annual deductible can save you money in the long term. This is especially true if you have the ability to contribute to a Health Savings Account (HSA) in combination with the high-deductible plan. All contributions to HSAs are pre-tax and all withdrawals used for eligible medical, dental and vision expenses are tax-free. For people in high income tax brackets this can be a significant savings. If you don’t end up needing the funds for medical expenses you can invest them to grow tax-deferred until needed, which can be a considerable help in retirement.
Flexible Spending Arrangements (FSAs) are another common benefit option that can provide tax savings. Similar to HSA plans, contributions are made pre-tax and withdrawals for eligible healthcare expenses are tax-free. Be sure to check the fine print on these plans, because contributions not used during the calendar year are often forfeited! It’s important to consider your expected medical expenses carefully before enrolling. Some FSA plans can also be used for dependent care expenses, which is a fantastic benefit given that daycare costs are not only expensive, but generally consistent and predictable making the “use it or lose it” feature of FSA plans less daunting.
We generally have fewer choices with our dental and vision plans, but make sure you consider enrolling since the cost of annual coverage is often significantly less than one filling or pair of glasses. If you do have plan choices, compare the copays in addition to the monthly premiums.
With all plan options pay attention to “out-of-network” restrictions and check to see if your favorite doctor is considered “in network” if you are unwilling to make a switch.
At the very least, you want to be sure you are enrolled in your company retirement plan and contributing enough to receive the full benefit of any employer contributions. This is free money, so don’t leave it on the table! If you really want to take advantage of your retirement benefits, it’s best to take a careful look at all of the options, evaluate whether you are contributing enough to provide for your future retirement, and analyze your investment allocation at least once a year. Many people find this process overwhelming, but this is an area where a financial planner can prove their worth, so don’t hesitate to ask for help. Even savvy investors can miss out on significant benefits by overlooking options in their retirement plan such as mega back-door Roth contributions or discounts in an employer stock plan.
Many employers automatically provide a certain amount of life insurance for you, generally a multiple of your salary. For a lot of people this is not enough coverage, but you often have the ability to purchase additional coverage through your employer’s group plan. This insurance is generally less expensive and can make sense for a portion of your insurance needs, particularly for people whose health may preclude them from qualifying for an individual policy. However, it’s important to keep in mind that the premium will likely increase every year as you age and the policy often terminates when you leave the company. It’s therefore important to consider whether you should obtain additional outside coverage, either because you have a long-term need or to lock in a rate while you are young and healthy.
People often protect their loved ones with life insurance, but fail to plan for a disability which is statistically much more likely to occur. Make sure to enroll for both short-term and long-term disability coverage.
As part of your annual benefits evaluation process it’s always a good idea to double-check that your beneficiaries and dependents are correct and up to date.
If you’re working with a financial planner, make sure to bring them your enrollment packet and get their advice before you finalize your enrollment. It’s surprising how many people don’t truly understand or take full advantage of their employer-sponsored benefits, and your financial planner can’t give you proper advice without knowing everything you have access to.
The Bottom Line:
Benefits enrollment might appear to be a trivial task, but it could have substantial financial implications if done incorrectly. Be smart about your choices and do the necessary homework to maximize your benefits.
It’s no secret that Medicare parts and plans are downright confusing.
So confusing, in fact, that many people unknowingly choose the wrong plan that ends up costing them thousands of dollars in surprise medical expenses from a doctor visit, a treatment, or simply filling a prescription.
Healthcare costs are one of the biggest expenses retirees face (but can be very manageable with the right knowledge!) which makes choosing the right plan even more important.
So whether you’re enrolling for the first time, or you’re already on Medicare, download our FREE Medicare Guide for help choosing the right plan that could save you thousands.
Inside, you’ll get the answers you need to these critical questions:
What do you need to decide before you enroll?
Already enrolled? Could you save money with a different plan?
Do you need supplemental coverage or Medigap?
This simple guide takes the confusion out of Medicare to help you confidently choose the plan that’s right for you.
If you have any questions about Medicare or would like personal help comparing options based on price and coverage, we’d be more than happy to help. Click here to schedule a call with a Merriman Wealth Advisor.
An important part of helping clients achieve their financial goals is helping them navigate questions and decisions around Social Security and Medicare. Whether it’s deciding when to start Social Security or applying for supplemental Medicare coverage, these decisions have a big impact on your financial situation and wellbeing.
This book is broken up into two parts, as Social Security and Medicare are complex topics. The first covers Social Security and strategies. The second part covers the ins and outs of Medicare and all its various plans.
We hope you discover strategies and new things that will help you make the best decisions for your situation. As always, we’re here to help and answer any questions you may have.
Leaving your employer to retire early or start a business can be exciting! One of the biggest challenges in either case is what to do about healthcare. Health insurance purchased on an individual market can cost more than $10,000 per year in premiums for those in their 50s and 60s. (more…)