July 2019

Do you want the government to help pay your health care costs? There is a way!

Author: Article By Thomas M. Dowling CFA, CFP®, CIMA®

I am sure I don’t need to tell you that health care costs are a major expense these days. Even though my wife and I are healthy, we have two active boys, and they get sick or hurt from time to time. It’s inevitable. Additionally, I am not getting any younger, and as I age, I may need more medical care. You might not want to believe it, but you may also be faced with more medical costs as you age.

A health saving account (HSA) is a tax-advantaged account that is used to pay for current and future health care expenses. This is one savings vehicle that can be tax-free if the funds are used for qualified medical expenses. You contribute the funds pretax; the money can grow tax-deferred, and then you are not taxed when you withdraw the funds for a qualified medical expense.

Qualified medical expenses, as designated by the IRS, include items such as deductibles, copayments, coinsurance, X-rays, eyeglasses, medicines, hospital services, etc. A more extensive list can be found at http://www.hsacenter.com/what-is-an-hsa/qualified-medical-expenses/.

Under certain circumstances, you can also use your HSA to pay for long-term care insurance. Please consult your insurance advisor or health care provider for specific details. Remember, these expenses are designated by the IRS and can be subject to change.

You set up this account at a financial institution, and since you are the owner, you can transfer the account to a different financial institution if necessary. The funds can be invested in a variety of investments such as stocks, bonds, and cash.

In order to qualify for an HSA, you need to be enrolled in a high deductible health insurance plan (HDHP). The IRS defines a high deductible plan as one that has a deductible of at least $1,350 for an individual or $2,700 for a family. For 2019, you can contribute $3,500 for an individual and $7,000 for a family into an HSA. If you are 55 years of age or older, then you can contribute $4,500 for an individual and $9,000 for a family. Contributions can be made during the calendar year and up to the April 15 tax-filing day the following year. Read more about contribution limits here: http://www.hsacenter.com/how-does-an-hsa-work/2019-hsa-contribution-limits/.

If you are under age 65 and withdraw funds from your HSA for non-qualified medical expenses, then you will be assessed a 20 percent penalty and taxed at your income rate. If you are over age 65 and you withdraw funds form the HSA for non-qualified medical expenses, then you will not be assessed a penalty; you will simply pay the taxes due on the amount withdrawn. Therefore, after you turn 65, this account can also be used in a way similar to a retirement account since it is taxed the same as a traditional IRA if you do not use the funds for medical expenses.

If you pay taxes and believe you will have medical expenses in the future (most of us will) then you can save on the taxes now. Invest those funds into stocks and bonds, and then when you need those funds in the future for medical expenses, you can begin to withdraw from the HSA, tax-free.

When an HSA account owner dies, the account can then pass to the spouse. If the spouse dies, or the account owner is not married, the non-spouse beneficiary then receives the money and is taxed (no penalty) at the market value of the account. The value is calculated for the year the owner dies. One thing to note is that the account can be reduced by any qualified medical expenses incurred for the deceased HSA owner up to one year after the date of death.

As you can see, a health savings account can be one of the few tax-free investment accounts you have. I believe more people do not utilize them because of lack of familiarity. 

Thomas M. Dowling CFA, CFP®, CIMA® is a Registered Representative and Investment Adviser Representative of and offers securities products and advisory services through Aegis Capital Corporation Member FINRA/SIPC as well as an SEC Registered Investment Adviser. As such, these services are strictly intended for individuals residing in the states in which the advisor is licensed. Aegis Capital does not provide tax or legal advice. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. You can contact Dowling at tdowling@aegiscap.com or (843) 715-2239

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