14 Aug

A New Diagnosis for Health Savings Accounts

With the rise in health insurance premiums over the past decade, many individual and corporate health plans now offer a Health Savings Account option. The premiums are often lower than other traditional policies and the benefits of an HSA make this option worth a second look. Individuals can contribute either lump-sum or periodic contributions (up to $3,500 for an individual or $7,000 for a family in 2019) to an account like an IRA. They receive a tax deduction for those contributions, and then can use those dollars to pay for medical expenses, typically up to their plan deductible. Did you know those H S A dollars can be used for other things?

Unlike the old Flexible Savings Account options in health plans that had to be used in the same calendar year, HSA contributions can be invested and used in the future. They can be used for vision, dental or orthodontic care for your children or banked for future health or even long-term care insurance premiums.

In one specific example, a 55-year-old with family coverage who plans to retire at age 62 contributes $7,000 plus a $1,000 catch-up contribution if they are covered by a high deductible plan. They receive a tax deduction on that contribution and can use those dollars to pay for their annual health care. Let’s say the same individual has a $3,000 deductible which they meet each year for 7 years.

Annual Contribution $7,000
55 + Catch up $1,000
Total $8,000
   
Annual Spent $3,000
Net Savings $5,000

At his retirement, he would have $35,000 ($5,000 x 7 years). Since he retired before age 65, he can use those health savings dollars to purchase COBRA insurance if offered by their employer, or to buy individual health insurance coverage before Medicare kicks in. In the same scenario, if the 55-year-old has a long-term care insurance policy with annual premium of $2,500, he can use the same HSA dollars to pay those premiums in retirement.

Health savings accounts are incredible planning tools for future health care needs especially if you plan to retire early. These accounts allow individuals to defer taxes on contributions during their working years, when their tax rates tend to be higher. They can then use those dollars in retirement to pay for health premiums or expenses, often at a lower rate.

If you currently are covered by a high deductible plan and aren’t contributing the maximum, the above examples may change your mind. If you don’t have an HSA, I’d encourage you to research your options when your annual benefits enrollment or health insurance renewal rolls around. The diagnosis will likely be good for your future.
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