Should I Fund an HSA Account?

Transcript:

Hey guys Mike Frontera here back with another retirement theory video. Well we're quickly coming up on open enrollment season for health insurance. And whether you're looking to sign up for a new plan or perhaps you're already part of a plan through work or through the healthcare exchanges it's likely that you have at least heard of the term HSA. But what you may not know are all of the amazing things that you can do with an HSA! I happen to think it's one of the best deals that the IRS gives us and yet it's one of the least understood accounts out there. so tie your shoes extra tight because I'm about to blow your socks off with some great HSA information!

OK before we get going let's cover the basics. By the way, if you think you know the basics and want to skip to the fun stuff, then drag the little video cursor at the bottom to the next video chapter. You should see a little break in the timeline to indicate that break.

Alright HSA 101!

First important question to ask yourself- Am I eligible to contribute to an HSA account? Well you gotta be able to answer all of three of these questions as “yes”:

is your annual deductible at least $1400 as an individual or $2800 for a family?
Are your maximum annual deductible and other out of pocket expenses no more than $6900 as an individual or $13,800 for family coverage?
Are you not yet eligible for Medicare nor Tricare?

Did you answer yes, yes, yes? Well then there’s a good chance you’re in! Now if you are participating in a health plan through work your employer might already have you enrolled in an HSA or may have at least made one available to you. But as long as you meet those eligibility criteria then you can set up an HSA for yourself regardless.

So on the surface an HSA account is an account that you put money into to cover qualified healthcare expenses. An HSA is to health care expenses as an IRA is to retirement expenses, or as a 529 plan is to college expenses. It's basically an account you can set up that the IRS has given special tax treatment to. And like its retirement an education counterparts the an HSA does have some rules that are important to recognize.

you can only contribute so much each year. The limit is $3550 as an individual or $7100 as a family. If you are 55 years or older during the calendar year you can contribute an extra $1000.

Now if you are a couple you can split that maximum contribution any way you like other than the contribution catch up, which is specific to the eligible person making it. So, you want to contribute $7100? You can contribute $7100, that full amount, for just yourself, or you can split it 50/50 with your spouse, or you any other way you guys want to split that up.

An important information for those who have a health insurance plan through work is that any money the employer puts aside for you in an HSA will go toward that limit.

Deadline for making those contribution limits is generally April 15^th of the following year for the year you’re making contributions. Your tax deadline.
If you take a withdrawal from your HSA for a non-qualified use, meaning not for qualified health care expenses, it will be subject to income taxes on the withdrawal as well as a 20% IRS penalty.

So, the HSA is to be used those qualified health care expenses that would qualify you toward your total health care expenses for taxes. But if you wanted to see the full list just go to the IRS publication 969 and I will put a link to at the bottom of this video for that.

Alright, so you know your eligible, you know the contribution limits, and the penalties for non-qualified withdrawals. So what makes the HSA so great?

Well the first is still a bit basic but it’s 100% worth knowing because it gets to the heart of the HSA’s appeal. That is, that HSA’s gets the coveted triple-crown of tax benefits!

First, you get a tax deduction when you make your contributions. This would be akin to the deduction you get when you make a contribution to a Traditional IRA or you put money away pre-tax in a retirement plan like a 401(k).

Second, the money inside the HSA can grow tax-deferred. It doesn’t need to be spent down every year. You can keep it as long as you like. And like your IRA or 401(k), you can invest your HSA in a variety of investments. And you don’t pay any taxes as your account grows in value over time.

Third, when it’s time to pull your money out and it’s used for qualified healthcare expenses, your withdrawals are tax-free! You heard that right – you can get a deduction on the way in and withdraw tax-free on the way out.

Not only that, but unlike most pre-tax retirement accounts, the HSA has no required minimum withdrawal age.

So wait a second…might it make more sense to be sure you maximized your contribution to your HSA before you even think about funding your IRA account? Well what if you have no healthcare expenses in retirement?

I’ve never met someone like this but even if that were the case, you’re still not out of luck. The HSA can double as a retirement account! Once you’re 65 years old you can use an HSA for any purpose and not pay a tax penalty. The catch is that you would have to include the withdrawal as taxable income if you’re not going to use the money for a qualified healthcare expense. In that regard the treatment would be very similar to what it would be if you were pulling from your IRA, 401k, whatever. And remember, no minimum required withdrawals.

But let’s take issue with “not having healthcare expenses”. As I said before you can look on IRS publication 969 for a list of approved expenses. And the list is huge. And beyond the basics, here are some surprising and frankly, awesome uses of an HSA for you, your spouse and your dependents:

Dental expenses!: routine check ups, x-rays, dentures, implants, fillings, braces - covered.

How about vision expenses: contact lenses, contact lens solution, glasses, reading glasses, prescription sunglasses, eyeglass repair kits!

Over the counter drugs: Tylenol, Excedrin, pepto bismol, allergy meds, cold remedies, cough drops, sleep aids, and foot creams

And here’s my favorite use of all – you can use your HSA to cover certain medical premiums and co-pays! Did you retire or lose your job and now you’re on COBRA? Pay your premiums from your HSA tax-free.

What about Medicare? Not a supplement or Medicare Advantage – but Medicare itself? Yes, you can pay your part B premiums right from your HSA! “Well wait a minute, my Medicare is taken right out of my Social Security”. That’s ok – with an HSA you can reimburse yourself for qualified expenses! That goes for any HSA eligible expenses by the way. For example, you’re paying this year’s Medicare Part B premiums of $144.50 per month. That means you could have drawn $1734 out of your Social Security checks. You can withdraw that same amount from your HSA tax-free.

Heck even long-term care insurance premiums can be paid from your HSA. Those are subject to the Federal tax-deductible limits. But still, how cool is that?

Finally, if you happen to have any money left in your HSA when you pass away, you can leave it to your spouse and it will be treated as if it were their own. Now if you or your spouse ultimately leave a balance to a non-spouse, like a child. Well then like Cinderella does at midnight, the HSA turns into a pumpkin. Your beneficiary would receive the remaining account balance in full and it would become taxable in the year that they received it.

Are you as excited as I am about HSA accounts? Well whether you want to know if you’re eligible to fund one, you want help investing your HSA, or you have an HSA and you’re not happy with how it’s invested, let me know!

Come visit me at www.retirementtheory.com or send me an email at mike@retirementtheory.com. Did you click subscribe on this video or follow me on Facebook? I think that you should. You’ll continue to see videos like these on everything retirement planning.

Once again, thank you for joining me, take care of yourselves, and we’ll see you next time!

Sources Referenced:

1. https://www.aaltci.org/long-term-care-insurance/learning-center/tax-for-business.php#hsa

2. https://www.irs.gov/publications/p969

Clips & References

“Well, we’re waiting” Caddy Shack https://www.youtube.com/watch?v=Z0YIJQ1jgEI

“Isn’t that special” Saturday Night Live https://www.youtube.com/watch?v=msDcShv_r20

“I am serious, and don’t call me Shirley” Airplane https://www.youtube.com/watch?v=ixljWVyPby0

Cinderella coach turns into a pumpkin Cinderella https://www.youtube.com/watch?v=Dyl_nW2n528

“Jerry I’m busting” Seinfeld http://www.tzr.io/yarn-clip/08157e2c-35d7-467f-8ff6-c5e7fd9e6ef5