By Harlan Storey​

Do rising healthcare costs keep you up at night? You’re not alone, as many Americans fear medical bills more than the underlying illness. While this is unfortunate, there are many ways to mitigate excessive healthcare costs, like using a Health Savings Account, or HSA. This account allows employees to make tax-free contributions and distributions for qualified healthcare expenses. Also, many providers allow account holders to invest their balances into vehicles like ETFs or mutual funds once they exceed a specific threshold, which is usually around $2,000. The top three HSA strategies to utilize in 2019 are setting up automated payroll deductions, understanding how Medicare impacts an HSA, and treating it as an additional investment bucket.

Automate HSA Contributions Per Pay Period

Fortunately, most employees can allocate a specific percentage or dollar amount to their HSA each pay period. Taking advantage of this simple method can make it effortless to accumulate a large HSA balance in the long run. These contributions are tax-free and are also exempt from FICA taxes, which fund Social Security and Medicare. Therefore, some believe it has more tax advantages than a 401(k) as traditional tax-deferred 401(k) contributions will always be subject to FICA tax.

Another great feature of payroll contributions is the employer match, which generally ranges from $1,000 to $2,000 per year. An employer’s contribution can also be a lump sum or divided into quarters and is generally higher for married employees. Keep in mind that these contributions reduce your maximum annual HSA contribution. So, a married employee can only contribute $5,000 to his or her account instead of the current limit of $7,000 provided the employer contributed $2,000.

Medicare’s Impact On HSAs

As you know, Medicare is a government program that taxpayers fund throughout their entire working life to pay for basic healthcare expenses in old age. It’s important to note that Medicare doesn’t cover all expenses, only bare necessities like hospital stays. Therefore, many senior citizens need to find additional ways to pay for healthcare expenses, with an HSA being one of them. However, you can’t contribute to an HSA if you enroll in Medicare, which is why you should tell your provider to stop making contributions well in advance before enrolling.

Regardless of your age, you can always use your HSA balance to pay for qualified medical expenses even after you take Medicare. Fortunately, these distributions will always be tax-free if they’re used for qualified medicare expenses as defined by the IRS. Once you turn age 65, non-medical expenses won’t be subject to a 20% penalty, but you’ll still have to pay federal and state income taxes.

Are HSAs Better Than A 401(k)?

Many account holders are asking themselves this question since distributions post age 65 won’t be hit with a 20% penalty. Unlike 401(k)s, HSAs are exempt from required minimum distributions or RMDs. RMDs apply to investors that turn 70½ and force them to withdraw specific distributions from tax-deferred accounts like 401(k)s and IRAs. It’s important to do this every year, as investors that don’t do this might be subject to a 50% penalty. Use this RMD calculator and consult your financial advisor to calculate your precise annual RMD amount. 

Be sure to ask your HSA providers about available investment choices like ETFs or mutual funds along with minimum account balances. Investment choices and minimum account balances fluctuate per provider, but most require a minimum balance of at least $1,000 to $2,000 prior to investing in securities.

The Bottom Line

Healthcare costs are rising exponentially each year and the United States has some of the most expensive healthcare in the world. However, using an HSA is a great strategy to plan for these costs and prepare for retirement in one fell swoop. HSAs can be powerful investment accounts as they aren’t subject to RMDs and FICA taxes, but any distributions post age 65 will be subject to taxes. These accounts are relatively straightforward, and the best ways to maximize your HSA include automating payroll contributions, recognizing Medicare’s impact on it, and using it as a supplemental investment account.

Do You Need Assistance With Using Your HSA To The Fullest?

Get in touch with us today by calling 330-526-8944 or shoot us an email at info@storeyassociates.com. Or, if you prefer, you can quickly and easily click here to schedule your free initial consultation online.

About Harlan

Harlan Storey is president and founder of Storey & Associates with more than 30 years of experience providing financial counsel to individuals, families, and small businesses. With a background as an estate planning attorney also providing tax services, Harlan now advises a clientele consisting of corporate executives, medical professionals, small business owners, and retirees. He specializes in income tax planning, business exit strategies, estate and insurance planning, asset allocation, and career transitions. In addition to his role as a financial advisor, Harlan is a member of the firm’s investment committee and manages the operations of the business. Harlan is a CERTIFIED FINANCIAL PLANNER (CFP®), member of the Financial Planning Association (FPA), and graduated from the University of Akron with degrees in accounting and law. Harlan was one of the earliest members of the National Association of Personal Financial Advisors (NAPFA), showing his commitment to fee-only financial planning. Harlan and his wife reside in North Canton, Ohio, and are the parents of two adult children. He enjoys spending time outdoors, running, kayaking, and tending to their two horses. Learn more about Harlan by connecting with him on LinkedIn.