Wiser Financial Advisor – Health Savings Accounts
Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.
This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly: email@example.com . Also please stay plugged in with us, get updates on episodes and help us promote the podcast. You can subscribe to us at Apple Podcasts, Spotify or your favorite podcast service.
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This is the time of year when we’re all starting to think about income taxes, because it’s tax season or it will be very soon. Tax forms will start coming out from all the different places we interacted with last year: W2’s, 1099s, all that good stuff. So, taxes are on a lot of people’s minds right now and today we’re going to be talking about health savings accounts and also a couple of other types of accounts that people might have as far as choices—because oftentimes there are tax advantages with these things.
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So today we’re going to talk about a few different things. The bulk of the conversation today will be about health savings accounts, known as HSAs, but before we get into HSAs, there are a couple of other things people might have choices about that I’m going to cover real quick.
One of those is flexible spending accounts. Flexible spending accounts are medical accounts sometimes offered by employers. We don’t see flexible spending accounts as much these days, but they are a way that employers can allow their employees to contribute pre-tax. That’s a big advantage, because then your overall taxable income is less, which allows you to defer those dollars for the plan year. The trick is, you have to choose the amount that is going to be deferred before the year starts. So, let’s say it’s the calendar year for 2022—you would have had to make your election in 2021 for how much to defer this year. Why do this? For the tax advantage. People look at doing this because they think that they will have some health expenses coming up. If you are really confident that you’ll have a certain health expense coming up, then you can use the flexible spending account to pay for it. When the money comes out of a flexible spending account, it’s tax free so long as it’s used for medical expenses, so it can be used for things like deductibles and copayments, dental expenses, out-of-pocket medical expenses, things like that.
You do want to be careful, because with this sort of plan, if you don’t use the dollars you’ve decided to contribute within the plan year, you generally lose them. There are a couple of exceptions to that, but generally this money is gone if you don’t use it. That’s why we call these in-flexible spending accounts sometimes, because they’re not very flexible. In fact, we had a client years ago who was going to get LASIK surgery and decided to max out her flexible spending account because she thought she was going to get that done. She got it scheduled, but after the eye doctor examined her, he said, “You know what, the shape of your eye is not conducive to doing LASIK.” So she had this balance in the account that she couldn’t use, and she was frantically trying to figure out whether she could go to Walgreens or something and stock up on different things such as Tylenol or other over the counter medical things. She did what she could but lost some of the money she had put into the plan. So a flexible spending plan is one of those things that’s very strict about the rules: if that money isn’t used during the plan year, you will lose it. If your employer offers this, really think about that, and if you make the contribution, just know you’re gambling with the money a bit and you want to be very confident in the expenses that you’ve got coming down the road.
Another thing that comes up as a choice sometimes is retirement medical accounts, sometimes called retirement medical savings accounts. Your employer may offer this and if they do, those accounts also will allow you to make a contribution, usually on an after-tax basis but those dollars come out tax-free later on. We don’t see employees contributing to these that much these days, and many employers don’t offer them. But sometimes if you’ve been with a company for a long time, they may have some type of retirement medical benefit for you. If you’ve had enough years of service and you’re the correct age and you’re retiring from the company, sometimes they’ll have a lump sum sitting there and you can use those dollars to pay for some of your expenses when you’re retired. Often, these are known as retirement medical savings accounts simply because they’re used to help pay premiums once you are retired. If you retire before age 65 before you hit Medicare age, you’ve probably heard that medical insurance is extremely expensive to go out and buy on your own. You could use something to be able to draw some dollars out.
There are a couple employers that work with our clients, and they drop a lump sum in an account for people to be able to use to pay for their medical premiums. Now I’m old enough to remember that back in the day, some of these companies offered a retirement medical plan that people could buy into. You could continue to pay premiums to the plan and have coverage after you left. You could stay on the company plan, and back then companies used to be generous to the point that sometimes employees didn’t have to pay anything but they would continue to get coverage for the rest of their lives. Well, of course many of these companies figured out how expensive that is and so they cut back. People who were already on those plans were not very happy about that change. Some of them were grandfathered in, which was great, but they oftentimes had cut-off points where if you weren’t already in the plan by a certain age, then you reverted back to a retirement medical savings account plan where they might give you 40 to 50 thousand dollars—which sounds wonderful, but when you look at how expensive health insurance is before age 65, you’ll note that it’s a really expensive proposition and you’ll be lucky if that money ends up lasting you until Medicare age, depending upon when you retire.
Something to be aware of is that there are time limits on some of these plans. One of the employers for our clients has a cut-off point at age 75, so if you reach age 75 and you still have a balance in the plan, you lose the money. Also, you oftentimes have to be retired to have your heirs be eligible for the benefit. Your plan will dictate how this actually plays out, so make sure you understand all of the details because that could be an issue. Don’t expect that the money in a retirement medical savings account will be passed on to your heirs until you actually retire, because they may not be eligible for it.
Okay, now we’re going to talk about Health Savings Accounts, or HSAs. According to healthcare.gov, a health savings account is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. This would be lots of different stuff. It’s pretty liberal; you can use it for any kind of out-of-pocket expenses, deductibles, coinsurance, other health-related expenses. However, it cannot be used to pay premiums. That’s really important to recognize that you cannot use an HSA to pay your medical premiums. So, as opposed to the retirement medical savings account option that your employer may have offered you, which would be able to go to premiums, HSAs are not for that, so do not go into retirement expecting to use your HSA to pay for medical insurance. That’s not an option. Those premiums are something that you really have to incorporate into your retirement planning.
We do a lot of cash flow planning with our clients and we spend a lot of time trying to punch holes in their retirement scenario. And sometimes people will tell us, “Well, this is what I’m going to be spending.” But they haven’t thought about what their healthcare-related expenses, especially medical premiums, will be. For assumption purposes, we tell clients to plan anywhere between $1,000 to $1,500 per person per month when they’re pre-Medicare. And you might say, “Josh, that is crazy,” but if you go out and start shopping for people that age, that number isn’t out of the question. Depending on what type of deductible you’re choosing for the plan you’re on, it will probably fall in that range. And while you can use the funds in a health savings account at any point in time, be aware that contributions can only be made until age 65. Even if you’re still working, there’s a finite amount of time for you to contribute to the plan, and that’s one reason we recommend you take a look at this subject early on. If you have the money to be able to let funds accumulate in an HSA, that could be a substantial amount to help you with deductibles and other out-of-pocket medical expenses. Because those medical premiums are so high, at least you would have an account set aside to cover the other stuff.
What are the limits to contributing to an HSA? For 2021 you can put in $3,600. For 2022, that has gone up by 50 bucks to $3,650. That’s if it’s only you. If you have a family, you can do up to $7,200 for 2021, $7,300 for 2022. So, you might ask, “Josh, why are you saying 2021 numbers? We’re in 2022.” That’s because you can actually go back. Believe it or not, you can go back and make a contribution up until April 15th for last year. This might be one of the last things that you can do to help you out for the prior tax year.
As opposed to the flexible spending accounts or as we call them inflexible spending accounts, health savings accounts can be carried over from year to year. In fact, there’s no time limit. If you really wanted to, you could make a contribution and then take the money right back out if it was a contribution for expenses from the prior year. In other words, right now in January of 2022, if I haven’t yet made an HSA contribution for 2021 and I’ve had a bunch of medical expenses for last year for out-of-pocket stuff, I could make an HSA contribution right now and then withdraw the money right back out and still claim the deduction. That’s the big advantage here—you’re putting money in on a pre-tax basis, meaning it’s deductible. And when the money comes out, as long as it’s used for eligible expenses, it comes out penalty and tax free. That’s a big deal because not only do you get the benefit upfront while the money is in there because it’s tax-deferred, but also on the back end, you withdraw the money on a tax-free basis, one of the very few things out there that would allow you to get that benefit.
So if you’re eligible for an HSA, they’re kind of a no-brainer because that’s money you’re probably going to use unless you are so healthy that you never use any kind of health or medical expenses. It’s really a good option. And because there isn’t any waiting period on using the money, you can use an HSA as an extra retirement account because you can contribute up to age 65 and then draw the money out after age 65 for non-medical expenses—although if you did, you would have some income taxes due at that point. But you wouldn’t actually lose the money the way you would on a flexible spending account.
So as far as how these work: If your employer offers a plan they might already have this set up for you. If you’ve chosen a high deductible plan—and for 2021 and 2022, that deductible amount is $1,400 for an individual or $2,800for a family—which is extremely common. Most people have a pretty high deductible plan these days because it helps with your insurance premiums. You aren’t paying as much because you have a higher deductible. Once you do that, you can make the HSA contribution. If for some reason you’re not on a high deductible health plan, then you cannot make an HSA contribution.
With regard to building these up over time, remember you can use them for an extra retirement account. Some clients are doing that, and if your employer offers it, that might be the easy button for you to contribute through the plan that they set up. See if they’re using Vanguard or Fidelity or something like that to hold onto those HSAs. More than likely, not only does the money go in there, but they probably give you a list of investment choices because some of these are meant to be for longer term dollars. If you’re thinking, “Hey, this is money I’m planning on saving for retirement or saving to cover healthcare related costs in retirement,” then maybe you’re starting to just build that up and choose some of the longer term investment options.
Now, you can open an HSA on your own. You can go directly to all manner of different institutions for that, Fidelity being one of them, where you can set up the plan and make contributions on your own. That would be what you would do if you’re self-employed or for some reason if your employer doesn’t offer some type of an easy button where you can set up an account through them.
These funds are portable, so be aware that you can move these funds if you leave your employer. You can take those dollars and roll them into another HSA and that’s just fine. You don’t want to forget about those funds, because sometimes people forget what they’re doing and change employers. Of course, this last year was the great resignation as they called it. In 2022 we might see the same thing, meaning that lots of people are looking at their employment options and looking at making a change. Oftentimes, especially younger people will change employers several times throughout their careers. So be aware that if you have benefits at that old employer, like HSAs or retirement plans, you really should talk to a Certified Financial Planner to make sure you are not leaving money on the table and you’re using that money to your best advantage.
So there are a number of different options that are healthcare related that you might be eligible for based on who you’re working with and your own situation. If it looks attractive to you to make an HSA contribution, I highly recommend it, but to sum up, there may be a number of different plans available to you based on the company you work for. If you work for the government or if you’re self-employed, be aware that you may be eligible for these different plans, whether flexible spending accounts, retirement medical accounts, or health savings accounts. Like any type of tool, you want to use those to your best advantage, especially because there are tax considerations. So be planning within the context of when this money is going to get used. With flexible spending accounts, it has to be used within the plan year. With health savings accounts, it could be used anytime in your life after the contribution is made, including right away.
We never want to leave money on the table. The world out there is so complex when it comes to money and the rules change constantly. Here at Keystone Financial Services, we are happy to sit down with you and talk to you about your own situation and how this might fit to use these things to your advantage as we go into tax season, especially health savings accounts because you may be able to go back for last year.
I hope you are doing great and you have a good week. Use us as resource as you are going into tax season and don’t leave money on the table. We always want to make sure that we’re using all the rules to our advantage and optimizing our situation so we end up with the most wealth in the end.
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Have an outstanding week and God bless.
This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.