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HSAs

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Let’s Give HSAs Some TLC

Many of us have heard the term “HSA,” but in my experience, few people fully comprehend what’s behind the initialism.

What is an HSA? HSA stands for Health Savings Account. It is a type of account into which taxpayers with high deductible health plans (HDHPs) can contribute pre-tax dollars, which remain untaxed if withdrawn to pay for qualified health expenses. Anything earned on those contributed dollars remains tax-free, too. In 2018 those individuals under single medical coverage are limited to contributing $3,450. Those under qualified family medical plans are limited to $6,900. Unspent contributions roll forward indefinitely, and those age 55 and over are allowed an additional $1,000 annually. Contributions are generally limited to those under age 65.

HSAs are also investable. After meeting a threshold of cash (typically $0 – $2,000 set bank by bank), the excess can be invested for growth. When you spend from the cash reserve, your invested assets are automatically sold to replenish it.

There are several benefits that arise as a result of contributing to an HSA: (1) Pre-tax HSA contributions decrease your taxable income, leading to lower taxes in the year you make them. (2) For most people, saving up for medical expenses a little at a time through HSA contributions is much easier to stomach than getting hit with a large, unexpected medical bill all at once. (3) If you invest your HSA, the earnings are also non-taxable if spent on qualified expenses.

What are qualified HSA expenses? The list of qualified health expenses is expansive. Eligible expenses include prescription medications, medical equipment, doctors’ visits fees and co-pays, hospital bills, dental services, therapy, and long-term care at home or in a nursing facility. It even includes some costs one might not immediately think of as healthcare, like glasses and contacts, guide dogs, drug addiction rehabilitation, and hearing aids. The comprehensive list is long and worth Googling.

Non-qualified healthcare expenses include non-prescription drugs, toiletries, cosmetics, childcare, funerals, international medications, and cosmetic procedures, among others.

Long-Term HSA Strategy: I discovered the most effective use of an HSA by accident. Over fifteen years ago, my company bought into a high deductible health insurance plan with an HSA account. I gave my daughter Meredith the HSA debit card to buy her prescription. She picked up her prescription at CVS along with enough OPI and CoverGirl cosmetics to make Kim Kardashian jealous. I promptly hid the HSA debit card in my sock drawer and started investing the contributions in an index fund.

Did you know that if a 30-year-old couple contributing the annual maximum invests at 7% their HSA instead of spending it, by age 70 they could have a balance of over $1,300,000 to spend on healthcare in retirement? The earnings are NEVER TAXED if spent on healthcare. With deductible contributions and never-taxed earnings, this is far better than IRA and Roth accounts.

The lesson here is to pay your healthcare expenses out of pocket as they come due, and treat your HSA a long-term investment vehicle. Parents, this also goes to show that your children can teach you things if you you’re your mind open to all possibilities. Each individual’s situation is different, but generally the rules hold fast: you will spend more on healthcare as you get older, growth comes with time, and tax-free withdrawals are always a plus. If you grow a healthy amount in your HSA, your retirement will feel better.

This article was featured in the September 16, 2018, print version of the Knoxville News Sentinel. Tom Coulter, President of Meridian Trust, can be reached at tcoulter@trustmeridian.com.