When it comes to paying for healthcare costs—both now and in the future—health savings accounts (HSAs) are among the most powerful tools available to consumers.
They allow consumers who have a HSA-qualified healthcare plan to set aside tax-free money for medical expenses. This year, eligible consumers with an individual plan can set aside up to $3,500 in an HSA and those with a family plan can save up to $7,000. (Those limits are going up by $50 and $100 respectively in 2020.) Those age 55 or older can add another $1,000 to those limits.
Despite their ability to turbocharge emergency and retirement savings, health savings accounts are also among the most widely misunderstood financial vehicles. Here’s what consumers often get wrong.
The myth: You have to use up the money in an HSA account every year.
The truth: HSAs roll over every year, and you even retain ownership of the account if your leave your current employer.
This myth stems from common confusion between HSAs and FSAs, or flexible spending accounts, which often come with traditional health insurance plans. FSAs are known as use-it-or-lose-it plans. (However, many companies that offer FSAs do let employees roll over $500 from one year to the next, or they will offer a grace period until March 15 to use the money.)
HSAs, on the other hand, always roll over. That means that they can benefit from compound growth over the long term, making them a vehicle for retirement savings for those who don’t need to tap the funds right away.
“You don’t need to use your HSA account for out-of-pocket expenses if you have other savings to use,” says Steve Wojcik, vice president of public policy at the National Business Group on Health. “You can save it instead and let it build up in your account.”
The myth: There’s a lot of paperwork involved in HSA withdrawals.
The truth: Most HSA-qualified health plans can provide you with a debit card for streamlined spending.
Paying for everyday health costs with an HSA is as easy as keeping your debit card on you and using it to pay for qualified health expenses just like you’d pay for any other transaction. You don’t even need to save your receipts. (Note: If you pay for any medical expenses out of current cash flow—i.e., outside your HSA—save your receipts. You can repay yourself from the HSA at any time, even years down the road.)
The myth: HSA funds have to be used for medical expenses.
The truth: Once you reach age 65, you can use HSA funds to pay for anything at all.
While it’s true that you’ll pay a 20 percent penalty for HSA withdrawals for non-medical expenses prior to age 65, after that you’re free to spend your HSA money on anything you’d like. For non-medical expenses, you’ll have to pay income tax on withdrawals, similar to withdrawals from an IRA, but you will not owe a penalty.
Even so, you may want to keep those funds earmarked for healthcare costs, which remain one of the largest expenses that retirees face. A recent Fidelity study found that the average couple could expect to shell out $285,000 on medical expenses, not including long-term care, in retirement. Having tax-free funds dedicated to covering those costs means you don’t have to use cash from other retirement accounts such as your 401(k).
You can also use HSA account funds to pay tax-free for the premiums for Medicare parts B and D, as well as Medicare Advantage plans, lowering their total cost to you.
“Generally speaking, HSAs are a fantastic retirement planning opportunity for most people,” says Michael Finke, a professor and the Frank M. Engle Chair in Economic Security at the American College of Financial Services.
The myth: Your kids or spouse need to be on your health plan to spend HSA money on them.
The truth: You can use your HSA funds to cover qualified health expenses for yourself, your spouse and any dependents without penalty.
Even if your spouse and children are on a different health insurance plan, you can use your health savings account to cover medical expenses on their behalf, Finke says. A few examples of family health costs covered by your HSA dollars include: braces, eye exams and glasses, Band-Aids, vaccines and physical exams. Those expenses include not only doctor and hospital and drug copays, but also out-of-pocket costs of dental and vision care and even a portion of long-term care insurance premiums.
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