I originally wrote this piece for our local newspaper and I’m sharing it since I’ve had a few questions regarding Health Savings Accounts. To see the original article, you can visit the Midland Reporter Telegram’s website here.
Health savings accounts (HSAs) are becoming more common, whether they are provided by your employer or one you hold through your own private high-deductible health plan (HDHP). And because HSAs have tax benefits much like a retirement account, we take a moment to look at the benefits of the HSA and how sometimes funding these can take priority.
HSAs for HDHPs
In order for a plan to be considered a HDHP, the annual deductible for 2016 can be no more than $6,550 for an individual and no more than $13,100 for the family. With the HDHP you are able to fund your HSA up to $3,350 for individual coverage or up to $6,750 with family coverage. If you’re over 55 you are also able to make $1,000 catch-up contribution.
Providing a triple tax break, HSAs allow contributions to be tax deductible, allows future earnings grow tax-free, and distributions are tax-free if used to pay for any qualified medical expenses (QME) such as your deductible, co-payments, prescriptions, dental, and vision. You are even able to pay for your long-term care insurance premiums with an HSA.
Versus Retirement Savings
Through your typical employer, the common retirement plan offered is a 401(k) or Roth 401(k) retirement account which allows a maximum contribution of $18,000 in 2016 ($24,000 if age 50 or over), and the maximum contribution to an IRA or Roth IRA in 2016 is $5,500 ($6,500 if age 50 or over). In many cases, your employer will offer you a matching contribution on your 401(k) contribution as well. Nothing like a 100% return on your investment right away!
The tax benefits on an IRA/401(k) allow for contributions to be deductible and tax-deferred growth until those funds are distributed. ROTH IRAs and ROTH 401(k)s do not allow you to deduct your contributions however they offer tax-free growth and distributions.
After-Tax Future Value
Because HSAs offer a triple-tax break, again including tax-deductible contributions, tax-free growth, and tax-free distributions on QMEs, HSAs may offer a greater after-tax future value than your basic retirement account. In fact, the higher one’s combined tax rate, the larger an employer’s 401(k) match must be in order to beat contributing to an HSA first.
Many variables go into the decision as to whether you should fully fund your HSA before your retirement accounts such as your tax rate, investment returns, and your employer’s retirement contribution matching rate. Be sure to discuss these variables with your tax advisor or other financial professional to see what is right for your particular situation.
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