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What You Need To Know About Your HSA

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Steve Pietila

Steve Pietila

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Healthcare is one of the biggest cost burdens for retirees today. A study by Fidelity estimates that retirees will spend upwards of $285,000 in total healthcare costs in retirement excluding long-term care. 

This makes proper healthcare preparation essential for pre-retirees. Proactive saving and planning throughout your working years can help prepare you for medical expenses down the road. One savings vehicle targeted toward health-related saving is a Health Savings Account (HSA). 

What is an HSA and how can it help you? Let’s take a closer look. 

What Is An HSA? 

A Health Savings Account is a tax-advantaged account designed to help people save for medical expenses. This account has many tax benefits that encourage active saving. The tax benefits of an HSA are three-fold: 

  • You contribute pre-tax dollars to a checking, savings, or investment account 
  • All interest or investment earnings are not taxable 
  • Distributions made for qualified medical expenses are tax-free 

Who can contribute to an HSA? You are able to enroll in and contribute to an HSA if you have a high deductible health plan and are under age 65. HSAs can be part of your benefits package or can be sought out separately. Unlike many tax-advantaged plans, HSAs are available to high- income earners. 

For 2020, an individual can contribute up to $3,500 for a single coverage health plan, or $7,100 for family coverage. Some employers will even contribute to your HSA through a match program like a 401(k), making it even more lucrative of a strategy. 

It is always best to automate your HSA contributions by electing to have a certain percentage taken out of your paycheck and funneled directly into the account. Your HSA balance will roll over year to year, so if you don’t use the funds it will keep accruing interest/earnings. 

How does an HSA differ from other savings vehicles? 

Unlike many other popular tax-advantaged savings vehicles like IRAs and Roth IRAs, an HSA doesn’t have a limitation of phase-out requirement at income levels. This means high-income earners can fully utilize the triple tax advantages of HSAs (pre-tax contributions, tax-free growth, tax-free distributions). 

But what happens if you take out money from an HSA that isn’t for a qualified medical expense? This is where you can expect to pay a lot of taxes and fees. For any unqualified distributions, the IRS will issue a 20% penalty on the funds while also charging you ordinary income tax on the distribution. Let’s say you withdraw $1,000 from your account that wasn’t for a qualified medical expense, you would incur a $200 penalty and be responsible for ordinary income tax on that $1,000 distribution. 

Once you reach 65 the funds from your HSA can be withdrawn penalty-free for any purpose, however, if the distribution isn’t for a medical expense you will be subject to ordinary income tax. Some examples of qualified medical expenses are 

  • Health plan co-payments 
  • Dental work 
  • Glasses and contacts 
  • Prescriptions 

An HSA also differs from its close counterpart an FSA or flexible spending account in a few ways. Like an HSA, an FSA is a health-specific savings/investment account. It also has some tax advantages like pre-tax contributions and no-tax distributions. 

But it differs in a few important ways. The annual contribution limit is lower, $2,740 for 2020, and the funds have to be used within the calendar year. If by the end of the year you haven’t used the funds in your FSA, you can’t roll the excess money over. While some plans have a grace period of 2.5 months, not all do. FSAs don’t allow for long-term savings and are more beneficial for individuals or families with more ongoing/regular medical needs. 

Why consider an HSA? 

If you are enrolled in a high deductible health plan, an HSA is a great addition to your savings strategy. HSAs provide so many tax benefits, making it a great way to save money over the years for medical expenses especially for costly deductibles and copays in retirement. 

With pre-tax contributions, you also lower your taxable income for the year which has a direct impact on your annual tax bill. 

This account can encourage you to start saving early and give you a good cushion for medical expenses down the line. HSA funds are also easily accessible which is good in case of an emergency or larger medical bills. 

An HSA With First Dakota 

At First Dakota, we offer a wide range of options to help our clients meet their goals. For those just beginning with an HSA, they can use an interest-bearing savings account. Once the savings account is built up to a comfortable level, additional proceeds can be invested for long term growth. 

We offer our clients a Non-traditional HSA for those interested in furthering their retirement benefits. We help clients use an HSA for an additional “retirement-like” plan to cover the costs of deductibles and copays that couldn’t otherwise be paid with other income sources. 

We can also help clients make the most of their long-term investment strategies by investing an HSA in conservative, balanced, or aggressive mutual fund options. We offer these varying degrees to best align with your risk tolerance and investment goals while also prioritizing long- term growth. 

This program allows you to transfer all or part of your HSA balances from your First Dakota Check card which can give you access to the funds for current and near-future medical expenses. But this non-traditional option works best when the funds are saved and used in retirement due to market fluctuations. 

Our Wealth & Trust Officers would love to speak with you to determine if an HSA would be a good addition to your retirement savings plan. Schedule a call with us today. 

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity and after death. We help clients develop a financial roadmap to help simplify their financial future. 

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provide tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.