by Peter Thoms, CFA
Effective management of your personal financial situation involves not only doing the big things right, but also doing many, many small things right as well. Lots of small things done consistently well compound into a massive improvement over time.
Often Overlooked, HSAs Offer Significant Benefits
With Open Enrollment for 2020 health insurance now under way, many are considering whether or not to enroll in an HSA-compatible health insurance plan so they can take advantage of the significant benefits of an HSA account. (HSAs are used with high-deductible healthcare plans (HDHP) to help individuals pay out-of-pocket healthcare expenses.)
We view HSAs as very powerful accounts because they offer the following triple-play of tax advantages that no other account can match:
- HSA contributions are fully tax deductible. 2019 contribution limits are $3,500 for individuals and $7,000 for families.
- HSA account assets grow tax-free.
- HSA distributions used for qualified medical expenses are also tax-free.
These tax attributes of HSA accounts put them at the top of the heap of retirement savings vehicles, ahead of Roth IRAs (contributions are made post-tax) and IRAs and 401(k)s (distributions are taxed on the way out).
Small Savings Add Up Over Time
Many people use HSA funds to pay for current-year medical expenses. However, we think HSA owners should make the maximum contribution each year—then consider covering their medical expenses with funds from outside their HSA. This way, their HSA assets can be retained in their powerful HSA account and invested for the distant future. And by contributing regularly to an HSA each year, HSA owners will not only lower their current-year tax bills, but also build a handy account that they can tap, tax-free, for medical expenses during retirement.
However, there are a few attributes of HSAs to consider when using them as savings vehicles.
- First, withdrawals are only tax-free if used for medical expenses.
- Second, many HSA custodians levy fees on transactions, so costs can add up.
- Third, the penalty for withdrawals not used for healthcare expenses prior to age 65 is 20%–versus a 10% penalty on IRA withdrawals prior to retirement.
As always, when it comes to making financial moves, what’s right for one person’s situation may not be right for another’s. However, using an HSA as a savings vehicle, given its trio of tax advantages, is certainly worth considering.
If you would like our thoughts on the markets or how you might reduce your tax bill by employing prudent strategies, please don’t hesitate to give us a call or send us an email.
To read more about our commentary on financial markets, click here: Our Commentary.