It is challenging to find any degree of optimism in the healthcare debate. Mostly, what we hear are rhetorical grandstanding and bitter divisiveness. Meanwhile, the uninsured continue to suffer and, for the fortunate ones who have coverage, their income is being siphoned by skyrocketing insurance premiums and prescription medication costs.
Yet, there is reason for hope through the Health Savings Account. The HSA is an amazingly useful medical-expense savings and retirement tool. Account holders can contribute thousands of dollars each year, receive a tax deduction for making the contributions, and withdraw the money for qualified medical expenses without paying penalties or income tax. Better yet, once you reach retirement age, you can draw the funds for any purpose, just as you would from an IRA, with no penalty.
In 2017, individual HSA owners can contribute up to $3,400 per year, and families can contribute up to $6,750. The IRS also permits individuals who are 55 years old or older to make catch-up contributions that increase those limits by $1,000.
Interestingly, some of the proposals under consideration in Washington, D.C., would nearly double the limit of allowable annual HSA contributions. Further, under the proposed legislation, HSA account owners may be able to use the funds for over-the-counter purchases (which is not currently permitted).
The significant benefit of an HSA is that the funds you contribute remain yours even if you do not spend them. Quite a few taxpayers are familiar with Flexible Spending Accounts (FSAs) that have a use-it or-lose it function; if you do not spend the money by the end of the year, it is gone. With HSAs, the money remains yours and it carries forward each year.
Any distributions from an HSA account that are used for qualified medical expenses are not subject to federal income taxes. Additionally, if you are making COBRA payments due to a loss of a health insurance plan, you can use the HSA for that too.
For retirees, you can use your HSA reserve to pay for Medicare. What’s more, once you reach 65, you can withdraw funds to pay nonmedical expenses and the distribution will be taxed the same as traditional IRA income.
HSA accounts are a terrific supplement to a retirement plan but they are not without their limitations. First, the funds cannot be used to pay either health insurance premiums or Medicare supplemental policy premiums, only qualified medical expenses. Second, you are not able to use both an FSA and an HSA; you may only use one or the other. Third, not all states offer the same tax benefits for HSA contributions.
Expanding HSAs to enhance eligibility and participation is smart, low-hanging fruit. This would be an easy way to encourage Americans to save more money – something that we desperately need.