This May Be the Best Time to Open a Health Savings Account

If you’ve thought about opening a tax-advantaged health savings account (HSA), but needed a little more motivation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act contains significant updates you should know about.

With all the talk about stimulus checks, unemployment benefits and small business loans, you may have missed out on this other bit of good news: It’s not too late to make HSA contributions that count toward 2019 tax year. The CARES Act has extended the deadline for 2019 contributions to July 15, 2020. So you can still open or add to an HSA and deduct the amount you contributed on your 2019 return instead of waiting until you file next year.

Why is that important? The immediate savings on your tax bill will put any money you contribute right back in your pocket. And once you’ve funded your HSA, you’ll be prepared to pay for qualified health-care costs as they come up. If you’re affected by COVID-19—or any other health issues during this challenging time—you can use your HSA to help with those medical bills, and you won’t be taxed on the withdrawals.

The CARES Act also expands the list of products and services that can be paid for from your HSA. Most over-the-counter medications are now eligible, including digestive aids, sleep aids, and cough and flu remedies. Gloves and disinfectant wipes also qualify for reimbursement.

If your finances get tight because of illness or lost income, you won’t have to use your paycheck or emergency fund for these health care items, or for any co-pays or out-of-pocket medical expenses you might encounter. You’ll have the HSA to help you preserve your cash. And if you find you don’t need the HSA distributions now, you can leave the money in your account to keep growing for the future.

HSAs Offer Tax Breaks for Today and Tomorrow

The coronavirus pandemic has heightened concerns about health care costs, but let’s face it, those bills are always a worry—especially for aging Americans. The average 65-year-old couple who retired in 2019 can expect to spend an estimated $285,000 on health care over the rest of their lives. And, much to the surprise of many new retirees, Medicare doesn’t pay for everything.

What can the average person do to prepare for those rising costs? Many individuals and families already are using tax-advantaged vehicles (such as 401(k)s, and traditional IRAs) to efficiently save for retirement and grow their wealth. But those who choose a high-deductible health insurance plan to cut down on their monthly premiums also may benefit by opening an HSA, which offers tax-preferred treatment on money set aside specifically for medical expenses and gives qualifying investors another path for potential growth in their retirement portfolio. That’s why it’s sometimes called a “medical IRA.” And the tax advantages to an HSA are often referred to as a triple-threat:

• The contributions to your HSA are tax deductible and you can invest the funds for potential growth;
• The money grows tax-free;
• And withdrawals aren’t taxed either, if you use them to pay for qualified medical expenses.

Making the Most of an HSA

As mentioned above, to qualify for an HSA, you must be covered by a high-deductible health plan. According to the IRS, in 2020 that’s a plan with an annual deductible that’s at least $1,400 for self-only coverage or $2,800 for family coverage. The plan’s annual out-of-pocket expenses can’t exceed $6,900 for self-only coverage or $13,800 for family coverage. (To qualify for 2019, the insurance plan must have had a deductible of at least $1,350 for individuals and $2,700 for families. Maximum out-of-pocket costs in 2019 were set at $6,750 for individuals and $13,500 for families.)

Like most tax-advantaged accounts, there are contribution limits to an HSA each year. In 2020, a person with self-only coverage can contribute $3,550, and those with family coverage can contribute $7,100. Savers 55 and older can contribute an extra $1,000. (2019 contribution limits were $3,500 for individuals and $7,000 for families.)

If you open an HSA through your employer, you can fund it with pre-tax automatic payroll deductions. Or you can open an account and make contributions directly. You also have the once-in-a-lifetime option to make a tax-free limited rollover from an IRA to an HSA.

Time Is On Your Side

One of the big perks to an HSA is that there’s no deadline for when the funds must be withdrawn. Unlike other tax-deferred savings/investment accounts, there are no required minimum distributions at age 72. You can make withdrawals on an as-needed basis each year, or let the money grow tax-free and tap it when you’re older.

An HSA can be a useful tool for dealing with many of the medical costs that come with aging, including those that Medicare doesn’t cover. Once you’re enrolled in Medicare, you can no longer contribute to an HSA, but you can continue to pull from your account.

You also can access your funds at any time for things other than medical costs—but you’ll pay a penalty. Prior to turning 65, withdrawals for nonqualified medical expenses will be taxed as income and will trigger an additional 20% penalty. When you’re 65 and older, the penalty goes away, but the tax remains—which means it’s critical to keep track of all applicable records and receipts.

Understanding Your HSA Options

Many employers now offer HSAs, and they’re also available through banks and credit unions, insurance companies and financial advisors. Keep in mind, though, that your choices may be limited unless you’re working with an advisor who can help you find the best fit for your needs.

To learn more about the advantages of this effective financial planning tool, contact Opal Wealth Advisors. We can help you determine if opening an HSA is right for your situation.