The Power of Health Savings Accounts
By Elizabeth Hail
Looking for a boost to your retirement savings options? Look closer into opening a health savings account.
Health savings accounts are tax-advantaged savings accounts designed to cover health care expenses to and through retirement. These tax-advantaged accounts offer benefits akin to those of contributing to a pre-tax employer-sponsored retirement plan, such as tax-free contributions and tax-free growth.
However, unlike your typical retirement account, health savings account contributions are made pre-FICA tax, making them even more tax-advantaged! While these vehicles were designed to help offset health care costs, many offer an investment menu, similar to your employer retirement plan. This allows you to invest a large portion of the account for potential appreciation above and beyond traditional savings rates.
Notable: It is important to note that health savings accounts must be paired with a high-deductible health plan. As such, they are not available within all benefit structures.
Benefits of health savings accounts
Benefits, per current law, include but are not limited to:
- Potential quadruple tax exempt:
- Tax-free contributions.
- Tax-free growth.
- Contributions made are pre-FICA tax.
- Tax-free withdrawals (if used for qualified medical expenses).
- Penalty-free withdrawals after age 65.
- Potential employer contributions to help fund your account.
- Portability (you can transfer to a new employer, assuming they have a high-deductible health plan).
Other unique features include:
- No time limit on reimbursement (if you keep records of your qualified medical expenses, you can make withdrawals against those reimbursements years down the road!).
- Can be used to pay long-term care or COBRA premiums (up to certain limits).
- Not subject to probate.
It is important to note that any health savings account withdrawal not used for qualified medical expenses will be subject to ordinary income tax and a 20% tax penalty. After age 65, or upon disability, the penalty is typically not assessed.
Primary takeaway: With their tax-advantaged nature and multifaceted benefits, health savings accounts can serve as a great complement to your overall financial plan. If you retain and invest your balance (not tap for medical expenses), those funds can compound to further enrich your retirement savings reservoir.
Questions?
Northern Capital Management advisors are certified financial planners with extensive experience working with medical professionals.
You may reach us by utilizing our WSMA member contact form.
The WSMA is a client of Northern Capital Management and Northern Capital Retirement Services and receives compensation for promoting our services. As a result of the compensation arrangement there is an inherent conflict of interest. Review the disclosure.
See here for current IRS funding limits and more detailed information.
Elizabeth Hail is a financial advisor with Northern Capital Management. This article is brought to you by WSMA’s preferred partner, Northern Capital Management, providing WSMA members financial planning and wealth management support tailored to the unique needs of the physician community.
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