Using a Health Savings Account through the stages of your life
Health Savings Accounts (HSAs) are gaining popularity in the United States – in part because health care costs are rising, but also because consumers want to take charge and make the most of their health care dollars. HSAs can make a significant difference to your budget bottom line – at all stages of adult life.
What is an HSA?
An HSA is a personal, tax-advantaged saving account that works in conjunction with an HSA-qualified health plan – a high deductible health plan (HDHP) with a minimum deductible of $1,150 for single coverage, or $2,300 for family coverage. Maximum annual in-network out-of-pocket expenses are $5,800 for single coverage or $11,600 for family coverage. Through an HSA, you can save money to pay for qualified medical expenses as defined by the Internal Revenue Code.
HSAs can be effective because of their triple-tax advantage:
• Contributions are tax-free up to the IRS’ annual maximum limit.
• Interest and investment earnings are tax-free.
• Withdrawals used for qualified medical expenses are also tax-free.
In order to open and contribute to an HSA, you must be enrolled in an HDHP, cannot be enrolled in any non-HDHP plan, cannot be enrolled in Medicare, be a dependent on someone else’s tax return, or have received VA medical benefits in the past three months.
HSAs for 20-somethings
Parents understand how important health coverage is but their young adult children may not. If they are too old to be covered by your insurance, and not yet covered by their own, there are options.
The first step might be to obtain health care coverage in the form of an HDHP. According to the Center for Policy and Research think tank run by America’s Health Insurance Plans in Washington, D.C., the average premiums for a young adult are $1,500 per year. Once enrolled in an HDHP, and assuming other eligibility requirements are met, the young adult can open an HSA. He or she (or their loved ones) can then deposit money up to the maximum annual contribution limit as defined by the IRS, and use it for a variety of medical costs today and into the future.
Funds in an HSA can grow tax free. And, because there is no “use it or lose it” provision, the account stays with a person through their lifetime.
HSAs for middle age
Statistics from the American Medical Association show there are nearly 50 million individuals in families who spend more than 10 percent of their household income on medical care. Regular checkups, eyeglasses and braces can add up. HSAs can help stretch buying power because you are using pre-tax dollars to pay for qualified medical expenses.
These accounts also can help save money for healthcare costs during retirement. Financial advisers often characterize an HSA during this stage of life as a medical emergency fund and suggest it be part of your retirement planning strategy. One possible strategy suggested is to meet your company match for 401(k), then contribute the maximum to your HSA and put the remaining retirement saving dollars into your Individual Retirement Account or 401(k).
Contribution limits to an HSA change annually. In 2009, the maximum contribution limits are $3,000 for single coverage and $5,950 for family coverage.
HSAs for retirement age
Even if we take great care of ourselves today, we know that as we age we’ll inevitably require some form of health care, whether it’s a daily prescription or even long-term care in a nursing home. According to the Center for Retirement Research at Boston College, a couple retiring in the year 2030 can expect to spend nearly $400,000 during retirement on healthcare alone.
You can’t use HSA dollars to pay for “regular” medical insurance premiums, but the IRS allows you to use your HSA dollars to pay for Medicare premiums – that’s an average of $1,200 per year, according to the Centers for Medicare and Medicaid Services. And, if you are age 55 or older, you can make an additional catch-up contribution of up to $1,000.
An HSA in your health care tool box can help you better manage your healthcare costs. And that means you can save your retirement nest egg for the things you’ve been dreaming about – like spoiling your grandkids and traveling around the world.