Health Savings Account: Potential HSA Advantages and Disadvantages
When it comes to retirement, one of the biggest worries we will face is the high cost of healthcare. According to the Employee Benefit Research Institute, a 65-year old man would need at least $131,000 to cover health care cost in retirement and for a 65-year old woman it’s more at $147,000.
And the simple solution? The health savings account (HSA) which is a medical savings account available to individuals in the U.S.
It was introduced in 2004 to help people offset the out of pocket expenses of health insurance plans with high deductibles. You can open a health savings account if you’re under 65 years of age and you are on a high deductible health plan (HDHP).
The tax benefits of HSA
For a lot of Americans, the Health Savings Account is a very good option for paying for their qualified health-related expenses using tax-free dollars. Make sure to visit Publication No. 502 on the IRS.gov website to see what types of medical expenses qualify.
This tax-advantaged account, allows taxpayers to save for medical expenses that HDHPs do not cover. HSAs, providing people with a way to control health care costs. They are similar to personal savings accounts, but the accumulated funds can be used to pay for medical expenses.
You have to bear in mind that employer retirement and 401k should be your primary retirement savings account and not HSA.
The account is owned and controlled by the taxpayer, and not by the employer or insurance company.
We need to be careful when we talk about cutting health care costs. They are not going to be reduced – what we really want to do is slow the rate of increase
– Dave Obey
How much can you save and contribute to HSA for 2018?
Contributions are limited to a certain amount each year. For instance, the maximum amount for 2018 was $3,450 for individuals and $6,850 for families, and an additional $1,000 catch-up contribution can be added if you are over 55.
You may ask, what happens if you end up contributing more than what you need? If you’re under 65 years of age, you will owe income tax and penalty on nonqualified withdrawals. After age 65, you are allowed to take the money out for any reason without penalty. You will still have to pay tax on the nonqualified part of your withdrawals.
In order to decide whether HSA is right for you, several things have to be taken into consideration. If you have no health issues and want to make savings to cover future health care costs, or if you are near retirement, an HSA may be a good choice.
In contrast, if it’s probably you will need an expensive medical care in the near future, and it will be hard for you to meet an HDHP, an HSA won’t be considered the best choice.
Below I outlined the HSA advantages and disadvantages.
Potential HSA advantages:
- You make the decision concerning the amount set aside for medical expenses.
- Spend your HSA money as you wish. Choose the health care based on quality and cost.
- Despite the fact that your employer may contribute to your HSA, you are the owner of the savings account and the amounts deposited in it, even in the case of changing jobs.
- Any unused amounts at the end of each year are rolled over to the next year.
- Deposits made to the HSA are not taxed.
Potential HSA disadvantages:
- As health problems are unpredictable, it is difficult to plan an accurate budget for medical expenses.
- Information concerning the cost and quality of healthcare can be hard to find.
- There are people who find it difficult to set aside money for contributing to their HSAs. Older individuals and the ones with health problems may not be able to save as much as younger, healthier people.
- You may choose to avoid medical care when you need it, to save money in your HSA.
- Taxes are paid on the amount withdrawn from the HSA for non-medical expenses.
The health savings account can be passed on to the account holder’s spouse in case his/her death, and the beneficiary can use it for qualified health care expenses. However, the account loses its HSA status and its fair value becomes taxable in the year of death for non-spouse survivors.
Though Health Savings Accounts are becoming common in the workplace (20.2 million HSAs as of January 2016), few people are allowing their funds to grow.
According to the Devenir, in 2017 the number of HSA accounts surpassed 22 million, holding about $45.2 billion in assets. The bad news, still only about 7% of Americans have enrolled in Health Savings Account.
As many advisors believe, it is beneficial to wait and not spend the amount in the account.
According to Jeffrey Levine, a chief retirement strategist at Ed Slott & Co., if you let the money grow, you would get the deduction for the contributions, taxes on growth would be deferred, and withdrawals are tax-free at a time when you’re likely to incur medical expenses at a greater frequency.