It is hard to believe that we are halfway through 2021, but here we are. Inflation, politics and interest rates have dominated the headlines as well as being the primary culprits of market volatility. Most recently the FOMC, led by Federal Reserve Chair Jay Powell, left rates unchanged. But in their comments and subsequent answers to the press’ questions, it became clear that the better-than-expected economic recovery from COVID and price increases had the Fed’s collective attention. So much so that the Fed raised its forecast for the remainder of this year for both economic growth and inflation expectations. Interestingly, the Fed did not change any of its expectations for the following year. This would indicate that the Fed continues to believe that these current shortages in labor and materials, as well as recent price increases, will be temporary. As of now, we see the current trends as constructive for the equity markets and as showing favor to growth over value. As 2nd quarter numbers become available, we plan to take a deeper dive into markets and the economic data in next month’s “Notes”.
In the meantime, we wanted to share with you a planning idea which we shared at our most recent virtual event: the Health Savings Account, or HSA for short. An HSA is the most tax-efficient way to put money aside for qualified medical expenses for you and your family. And unlike dollars in a “flexible spending account”, which are forfeited if not used by the end of the year, dollars in an HSA do not need to be used during the year in which they are deposited. In fact, dollars in your HSA are yours to keep, even if you leave your job, move, or change health insurance, and they can be invested for later years, which makes them an excellent vehicle to save for medical and other expenses during retirement. While HSAs are individual accounts, the funds in the account can be used for the qualified medical expenses of the owner’s spouse and, with some exceptions, children.
The primary prerequisite of an HSA is that they can be opened and/or contributed to only by individuals who are enrolled in a high-deductible health plan (HDHP). HSAs may not be opened by those covered by Medicare or claimed as a dependent on someone else’s tax return. This does not apply to withdrawals from an HSA, which can be made regardless of one’s health plan—so it can be used to pay expenses after one is no longer enrolled in a HDHP.
The primary benefit of an HSA is the efficient tax treatment of dollars contributed to the account. HSA dollars used for qualified medical expenses are triple tax-advantaged; that is, 1) contributions to the account are exempt from federal income tax, 2) growth and income within the account is tax free, and 3) withdrawals for qualified medical expenses are tax free. For qualified medical expenses to
However, it’s tax efficiency is not limited to qualified medical expenses. HSA funds used for other purposes are taxed in the same way that dollars withdrawn from an IRA are taxed—only upon withdrawal—but are subject to premature withdrawal rules unique to HSAs. In effect, the tax treatment of an HSA is very much like that of an IRA, with the enhanced advantage of tax-free withdrawals for qualified medical expenses. Another advantage of the HSA over an IRA is that HSAs are not subject to required minimum distributions.
Like IRAs, HSAs also have contribution limits. For 2021, contribution limits to HSAs are $3,600 for an individual or $7,200 for a family, and if you are over the age of 55 you can add an additional $1,000 as a catchup contribution to the individual or the family limit.
If you are interested in opening an HSA, a good starting point might be to speak with your Human Resources department. They can confirm whether you are currently enrolled in a HDHP or whether a HDHP is available as one of the offerings. In addition, they can help you set up pre-tax payroll deductions. Many 401k plans, banks, and financial institutions, including Fidelity—the custodian for most of our clients’ accounts—have HSA-qualified accounts that can be opened easily. If neither you nor your spouse are covered by an employer-sponsored health insurance plan, your Stone Bridge team can help you work through these questions.
When considering how much you might want to contribute to your HSA, it will depend heavily on your specific financial circumstances and goals. If your budget allows and it fits with your long-term plans, you might want to put in the maximum allowed. As we’ve said, anything you don’t spend on this year’s medical expenses can be used in future years and potentially invested with the goal of being using during retirement. If not, a useful starting point is to consider the amount you may be saving in premiums if you are switching from a traditional health plan to a high-deductible health plan, or by calculating what you think you will spend out of pocket for your deductible, copays, or coinsurance. No matter what your situation may be, we are happy to discuss this further with you in light of your specific circumstances.
HSAs are a great way for you to pay for medical expenses both now and during retirement. We believe that considering an HSA as part of your overall financial plan is smart and can really add value. For personalized advice about how an HSA may fit into your retirement plan, speak with your Stone Bridge team. Also, check out our recent interview in the latest edition of Edge magazine discussing planning for healthcare costs during retirement.