In the midst of the global coronavirus outbreak, paying for unexpected medical expenses is a major concern for many Americans and their families. While most insurers are eliminating deductibles and copays for COVID-19 testing, the full cost of treatment and potential hospitalization are unfortunately not covered under many plans. While we hope your family remains safe and healthy during the pandemic, it’s wise to have a plan in place to help cover unexpected medical costs, whether it’s related to COVID-19 or another illness or injury down the line.
Fortunately, there are solutions available to help you save for unexpected medical bills so that you and your family can focus on what truly matters: getting healthy. A health savings account (HSA) is one of the most efficient savings vehicles that an individual can take advantage of to help save for future medical costs, however, it’s not appropriate for everyone. Make sure to consider all the pros and cons before opening an account.
Who Should Consider an HSA?
First and foremost, you must have a high deductible insurance plan as these plans give you the option to put more savings toward health care and retirement savings. You must also be diligent about saving for future medical costs. Additionally, it is important to keep in mind how much you can actually save annually under federal regulations. Individuals can contribute up to $3,500 and families have a contribution limit of $7,100 in 2020, while if you are 55 or older you can contribute an additional $1,000.
Before opening an HSA, make sure to review these additional benefits and drawbacks to determine if this account will help you reach your savings goals and meet your health care needs.
The Tax and Inheritance Benefits of HSAs
One of the most significant advantages of HSAs is the triple tax benefit. If you are using an HSA for qualified medical expenses, funds contributed to HSAs are tax-deductible, meaning the amount can be taken out of your taxable income for that year. The funds in the account can be invested and the earnings accumulate tax free.
Additionally, the SECURE Act has eliminated stretch IRAs, which previously allowed beneficiaries to continue to grow an IRA tax-deferred with lower required minimum distributions over the course of several decades. Under the new retirement legislation, HSAs could prove to be a useful alternative for individuals looking to gift money to their heirs. Anyone can make a distribution to an account holder’s HSA, meaning that parents or grandparents can contribute to their children’s HSAs on their behalf. Unlike IRAs, health savings accounts don’t have required minimum distributions, so HSAs can keep growing until they are needed.
The Risks of High Penalties and Account Fees
As soon as you reach the age of 65, you’re able to use the funds in your HSA account for anything, health care-related or otherwise. However, if you use your HSA for nonqualified expenses before you reach 65, you will be subject to a 20% penalty. In addition to that penalty, you’ll be taxed on the amount you withdraw for non-medical purposes. This means that it is important for you to remain diligent and only use the funds in their HSA for qualified medical expenses.
It is also important to consider that HSAs charge a high general account fee. Some HSA accounts will charge a monthly fee, while other accounts charge a fee for each transaction you make. These fees can eat into the savings you’ll reap from having an HSA in the first place. However, under the Affordable Care Act and other legislative proposals, there are initiatives seeking more flexibility and options in terms of providers, rather than just your local bank.
Despite certain drawbacks, HSAs are a useful savings tool and should certainly be considered during the financial planning process. Get in touch with a member of the NEIRG team if you are interested in learning more about opening an HSA account.