By: Colleen Weber
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By Colleen Weber, CFP®, CPA
ln theory we all know that medical bills can be ridiculously high. But did you know that the average medical bill for a heart attack is $20,246? (1) With a number this staggering, it’s no wonder people are more afraid of healthcare costs than sickness itself. (2)
Unfortunately, these costs are predicted to continue to rise. Thankfully, we’re not completely powerless. There are many ways to plan for rising healthcare costs, the most popular option being a health savings account (HSA). An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses (3) and is used in conjunction with a high-deductible health insurance plan. Allow me to break it down for you.
Using an HSA has three major tax advantages:
- You make pre-tax contributions (lowering your total tax liability at the end of the year).
- You make tax-free withdrawals for qualified medical expenses.
- Your funds grow tax-free.
As long as you use an HSA for its intended purposes, you never pay taxes on the money in the account. Think of it as a tax-free trust for your health. The only time you may be subject to taxes or fees is if you contribute more than the maximum yearly amount or use the funds for non-qualified expenses.
But Is An HSA Right For You?
Aside from HSAs being tax-free in every sense of the word, there are a few more reasons why it might be the ideal solution to your healthcare worries.
- Many employers offer HSA contribution matches: Similar to a 401(k) contribution match, if your employer matches $500 per year, for example, you can also contribute $500 and see a 100% return on your money.
- Your HSA funds roll over year to year: Unlike flexible spending accounts (FSAs), your HSA funds stay with you indefinitely, even if you switch jobs or no longer have a high-deductible health plan. These funds have no expiration date.
- It’s an efficient way to fund healthcare costs in retirement: You can invest your HSA money in ETFs or mutual funds once you have a certain amount in your account—usually around $2,000. If you choose to invest your HSA funds instead of using them for day-to-day healthcare expenses, you can build your own separate “healthcare” nest egg for retirement.
What Do I Need To Get Started With An HSA?
To qualify for an HSA, you must meet the following requirements: (4)
- Be covered under a high-deductible health plan
- Have no other healthcare coverage
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else’s tax return
The contribution limits for 2020 are $3,550 for self-only plans and $7,100 for family plans. (5) If you’re age 55 or older, you can make an extra $1,000 per year in catch-up contributions. You can use funds from your HSA at any time, but you can only make contributions while you’re enrolled in a high-deductible health insurance plan.
We’re Here To Help
I’m sure it’s not surprising to hear that out of all retirement worries, 41% of Americans are most worried about healthcare costs. As you prepare for your golden years, a health savings account is a great way to alleviate this stress. But before you set up your HSA, it’s important to meet with a knowledgeable financial advisor who can help you maximize its benefits for retirement. Our team at Colleen Weber CPA, CFP is here to walk you through the fine print and show you how to use it in the most tax-efficient way. To get started, book a free introductory meeting online! We look forward to hearing from you!
Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER™ professional, and CPA with more than 15 years of financial planning experience. Providing comprehensive financial planning and wealth management, she specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes, and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.