Retirement is the prize at the end of years of hard work and a responsible financial strategy. Medical expenses, on the other hand, are virtual certainties that can happen suddenly and well before retirement age. Health Savings Accounts (HSAs) are becoming increasingly popular ways for individuals to prepare for healthcare concerns. HSAs distinguish themselves from other retirement account types by providing unique tax advantages, though you’re still able to explore the same alternative asset options. To qualify, a prospective HSA holder must be enrolled in a high deductible health plan (HDHP). While other retirement accounts only benefit the holder, any spouses or dependents enrolled in the same HDHP are eligible for the same benefits as the HSA holder.
Like an IRA or 401(k), you may contribute to your HSA and allocate the funds toward your chosen investment strategy. Those with individual HSA accounts may contribute up to $3,400.00 for 2017, while those with family coverage may contribute up to $6,750.00. Account holders above the age of 55 may contribute up to an additional $1,000.00 per year. As with a pre-tax account, personal funds contributed to an HSA are tax-deferred up to the full amount. Employer contributions cannot be deferred, but they may be excluded from your gross income.
If you have a more common individual retirement plan, this may sound familiar from a tax advantage standpoint. So why contribute to an HSA instead of an IRA or 401(k)? Unlike standard retirement accounts, HSA funds may be distributed and applied toward qualified medical expenses without any tax liability, regardless of the holder’s age. Therefore, by making tax-deferred contributions and qualified tax-free distributions, you may cover medical expenses with little or no out-of-pocket money—including your deductible—and never have to pay taxes on the funds involved.
In this model, “applied” is used relatively lightly. Qualified medical expenses don’t need to be explicitly paid with HSA distributions for the holder to retain a tax-free benefit. For instance, if your account is situated entirely in precious metals and you suddenly accrue a medical expense, you don’t necessarily need to liquidate your holdings to make a qualified HSA distribution. If your deductible is $2,500.00 and 1 oz. Gold American Eagle coins are valued at $1,250.00 per unit, you may distribute two such items in kind for a total distribution value of $2,500.00. You can’t bring the two coins to the hospital and pay your deductible with them, but you still won’t have to pay taxes because the distribution value matches the expense. It’s important to remember that the fair market valuation of assets distributed in kind probably won’t match your qualified medical expenses exactly. Review your options accordingly, and consider maintaining an available cash balance for emergencies.
Per the IRS, qualified medical expenses include, but aren’t limited to:
Among non-qualified medical expenses are the following:
As you can see, any number of common medical expenses can be addressed with an HSA. Their continued rise in popularity is therefore no surprise. Available sources provide varying figures regarding trends in HSA activity, though all of them indicate consistent annual increases in the total assets held in HSAs. At New Direction IRA alone, total assets in HSAs increased 40% in 2015, and an additional 19% in 2016.
However, these accounts make up a relatively small percentage of our administered holdings, so they’re still not being utilized as readily as other account types. Some people worry about the required HDHP, but may not understand that HSA distributions may cover any due balances. Anything beyond the deductible is covered by regular insurance. Others may have concerns about contributing to an HSA while also budgeting for the paycheck deductions involved with company-sponsored health plans. The additional contributions may impact your day-to-day finances, but the long-term tax advantages are certainly worth considering as well.
As with any self-directed retirement or savings strategy, evaluating your financial situation and performing as much due diligence as possible are always recommended before implementing an HSA investment strategy. For more information about HSAs and qualified medical expenses, please review IRS Publications 969 and 502. You may also contact our client relations team with any questions or concerns.