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An Underutilized Savings Vehicle
While this tool is presently only available to employees, please read on, even if you're not an employee! That is because the concept is very important, the tool is growing rapidly in popularity and someday, God willing, it will take over and improve our dysfunctional health care financing system. The tool is called a Health Savings Account (HSA).
This summer I attended an in-depth seminar sponsored by Harvard Pilgrim Health Care on the subject. The presenter was William "Bill" Stuart, who is releasing a book on the subject, "The Tax-Perfect Retirement Account, Using a Health Savings Account to Build Medical Equity."
Available only in conjunction with a high-deductible health insurance plan, an HSA allow the owner to avoid the severe tax consequences of paying for medical expenses with after-tax dollars, which has been the norm. An employee contributes to his or her Health Savings Account with pre-tax dollars so there is more money available in that HSA to pay for qualified medical expenses.
Consider these two alternatives:
|
Using After-Tax Employee $ |
Contribution to
Health Savings Account |
| $ Outlay |
1,000
|
1,000
|
| Federal Income Tax at 20% |
-200
|
n/a
|
| State Income Tax (if any) at 5% |
-50
|
n/a
|
| FICA at 7.65% |
-77
|
n/a
|
| After-Tax $ available for claims, deductibles, co-pays |
673
|
1,000
|
But, as the seminar pointed out, it is even better than that. HSAs provide a triple tax benefit. There is no other benefit I know of that can make that claim:
1) The contributions avoid income taxes
and payroll taxes
-- 401(k) contributions, by contrast, do not avoid payroll taxes.
2) The potential growth is
tax-deferred.
3) Distributions are
tax-free.
Well ... There Are Limits
Naturally, the IRS caps the annual HSA contribution: $3,450/individual, $6,850/family in 2018 with a $1,000 catch-up for those over age 50. The plan deductible cannot be lower than $1,350/individual or $2,700/family.
So, you put $3,450 into the plan, take a tax deduction, and spend the whole amount on medical expenses (claims, co-pays, coinsurance) without tax consequence. What you don't spend accumulates and potentially grows tax-deferred until you need it. And you will.
 Fidelity estimates that a couple retiring at age 65 today will have approximately
$280,000 in medical expenses over the remainder of their lives. The main categories are:
- medical premiums,
- Medicare cost-sharing,
- dental (there are higher dental expenses as you age) and
- vision services.
Long term care costs are not included in this $280K estimate.
Most HSA custodians offer stock and bond mutual funds as an alternative for accumulations.
I think you'll agree that HSAs are an effective arrow to put in the quiver of the person preparing for retirement. Speaking of which, how prepared are you?
This is for informational purposes only and should not be construed as tax advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
In my last newsletter I wrote about the travails of caregivers. Here's a
personal story from a very dear friend and client about what that stage was like for her family. Some months after she wrote this her husband passed away peacefully in his sleep.
This client testimonial is for informational purposes only and is no guarantee of future performance or success.
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Selected Articles
More parents say they won't tap into retirement
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Thomas Phelps DeVol
is the founder of DeVol Insurance & Financial Services. He enjoys helping people transform their hopes about the future into attainable retirement plans. His persistence, know-how and diligence are the keys to his success -- and that of his clients.
Tom has three children and lives with his wife, Connie, and their son in Newton, Massachusetts. He enjoys gardening, tennis, jogging and opera.
Tom can be reached at 617-964-6404 or via
email
.
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