With healthcare costs continuing to spiral upward, and with many Americans’ favorite tax deductions eliminated by the Tax Cuts and Jobs Act of 2017 (TCJA), it’s the perfect time to explore whether you could benefit from establishing a health savings account (HSA).
The HSA was established as a tax-favored way to help cover healthcare costs without paying exorbitant healthcare insurance premiums. It also affords significant flexibility for account holders. Best of all, for those who qualify, the contributions are both tax-deductible and unlimited by contributions to other tax-favored plans like IRAs and 401(k)s.
First, a few basics. In order to qualify to set up an HSA, you must be:
- Covered by a high-deductible health plan.
- Not enrolled in any other plan.
- Not listed as a dependent on anyone else’s tax return.
- Not enrolled in Medicare.
If qualified, an individual can contribute a maximum of $3,500 to an HSA in 2019 ($7,000 for a family plan). Remember, this is true even if you are maxing out contributions to your other retirement plans. You may make tax-free withdrawals from your plan at any time to pay for qualified medical expenses. Perhaps best of all, you may roll over unused balances in your HSA from one year to the next (unlike the popular flexible spending plans, which, though also tax-deductible, require all funds to be used in the same tax year in which they are deposited).
This last point is very important. Your HSA can become an important source of retirement savings. If you are in good health and not using up the funds in your HSA, they can be invested so that the account can continue to grow and accumulate into retirement, when the likelihood of increased medical expenses is greatest for most individuals. This means that you can get a tax deduction for your contributions and tax-free growth as long as the funds are in the account.
Recent studies indicate that retired couples may need as much a $370,000 to cover medical costs in retirement, a figure that is likely to continue to grow. Having assets accumulating tax-free in an HSA can provide a huge source of security for one of the chief worries of those approaching retirement. When you enroll in Medicare, you will no longer be eligible to make new contributions to your HSA, but there is also no requirement for you to liquidate the account. This means that your HSA can continue to provide a source of tax-free funding for qualified medical expenses during your retirement years.
If your goal is to be a thriving retiree, it makes sense to examine the benefits of setting up an HSA account. You can get a handy tax deduction today, and over the long term, you can build up a significant cushion against high medical expenses — all in a tax-favored environment. If we can provide you with more information or answer questions, we would love to hear from you.
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