By: Michelle Buonincontri, CFP®, CDFA
What’s an HSA? I have heard some say it’s like a Roth IRA on steroids.
Health savings accounts (HSAs) are becoming more popular as high-deductible healthcare plans (HDHP) with this option become the norm. According to the IRS, a “ health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.”
HSA Contributions Are Tax-deductible
Like an IRA, HSA contributions are tax-deductible (according to IRS rules). So taxes are reduced now, and HSAs can be used in addition to IRA contributions (when applicable according to contribution rules) to further reduce taxes in a calendar year. No income phase-out parameters or income restrictions on these accounts—unlike with a Roth IRA—creates an opportunity for an additional retirement vehicle. This additional tool in your retirement toolbox is triple tax-free, which is especially important for high net worth individuals looking to defer income and reduce their tax-burden or those looking to close the retirement gap.
Tax-free Growth and Withdrawals
HSAs grow tax-free, like a Roth IRA, and allow tax-free withdrawals for qualified medical expenses such as deductibles and co-pays. This is particularly important in retirement when healthcare costs will be higher. So it makes sense, from a long-term retirement strategy perspective, to fund an HSA, allow it to take advantage of tax-free compounding and withdraw from it later in life—funding current medical expenses from other disposable income when feasible.
HSAs Go With You
No Required Minimum Distributions
Worried about increased income and subsequently increased taxes in retirement due to required minimum distributions (RMDs) from IRAs? Unlike an IRA, there are no RMDs on an HSA. You do not have to make a withdrawal, qualified withdrawals are not taxable, and the longer you allow the funds to grow tax-free, the greater the benefit.
Ability to Defer Tax-Free Withdrawals
There is no time limit on receipts for previous qualified unreimbursed expenses incurred when an individual owned an HSA. So a tax-free withdrawal can be made in future years based on those past receipts. For example, Colleen had an HSA and incurred $18,000 in qualified expenses (say for orthodontic expenses for her three children over a five-year period). She used a payment plan to pay for those expenses out-of-pocket. Years later, Colleen decides it would be nice to have extra cash for that rental income property she is looking to acquire. She can get a tax-free withdrawal from her HSA now using those qualified receipts from the past.
NOTE: Be aware of HSA distribution rules, as well as penalties, and taxation for non-qualified medical distributions. Consult a certified financial planner for comprehensive advice on strategies that address your specific retirement planning needs.
Michelle Buonincontri is the Founder of Being Mindful in Divorce. She’s a divorced single mom, passionate about using her professional experience as a CFP® & CDFA™ and personal journey to support women in transition; creating confidence through education so they can make financial choices with peace of mind. Bringing together a background in investment management, tax prep and retirement planning, to provide Divorce planning (with singles or couples) and Financial Coaching services, financial literacy workshops and writings.