Most people are aware of the benefits of saving through a 401k, 403b, Individual Retirement Account or Roth Retirement Account. Much has been written about ensuring you take full advantage of a company match in a 401k should your company offer a match. To not do so would be akin to rejecting a pay raise. Who would do that? There is, however very little awareness of an even more powerful savings tool. The Health Savings Account or HSA as it is often referred to.
Before we discuss the triple tax savings, let’s just review the basics of an HSA. A HSA is a savings account that can be used with a high deductible health insurance plan to provide tax favored savings for use with health care costs. Contributions are tax deductible, withdrawals for qualified medical expense are tax free, earnings that accumulate within the HSA are tax free and unlike flexible spending accounts monies in the HSA are yours, even as they continue to grow.
Not everyone can utilize an HSA. You must have a qualified high deductible health insurance plan. A High Deductible Health Plan is one with a deductible of at least $1,300 for individuals and $2,600 for a family. If your health plan qualifies as a high deductible plan then you are eligible to save through an HSA. To encourage employees to participate in a high deductible plan, many employers contribute to the employee’s Health Savings Account on an annual basis.
Total contributions to an HSA (for both employee and employer) are $3,350 for an individual and $6,750 for a family with an additional $1,000 for people age 55 and older. So, if you have maxed out your other tax deferred savings this is an additional tax preferred vehicle for savings.
Since the cost of health care for seniors is growing, many see the HSA as their savings plan for those costs down the road.
HSAs aren’t for the faint of heart though. To maximize your savings, you need to have free cash flow to make the contributions and the savings works best if you can pay medical expenses from a fund other than the HSA. In addition, to ensure that your health needs are addressed you have to be committed to seeking necessary health services. Far too many people with HSAs merely avoid necessary health care because they don’t want to pay for it.
HSAs are a very tax efficient savings vehicle and can boost your savings for retirement costs. With life expectancies increasing it is anticipated that health care costs in retirement will continue to grow. Maximizing your HSA savings while working will provide for health care funds for the future.
Contributed by Catherine Crandall, JD, CFP®, CTFA. Cathy joined Chemung Canal Trust Company in 2008 and is currently Senior Vice President and Senior Trust Officer of our Trust & Estate Administration Department.
For additional guidance, please contact Marci Cartwright at 607-737-3754 or firstname.lastname@example.org.