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Make More out of a Health Savings Account

Too often, employees think of  their Health Savings Accounts (HSAs) as if they were simply deposit accounts. In reality, HSAs have much greater financial potential – and it shouldn’t be ignored, especially with health care costs rising so dramatically.

With an HSA, you don’t have to “use it or lose it”. An HSA lets you set aside money each year for qualified medical expenses. Any money you don’t withdraw from your HSA annually is allowed to accumulate. If you have self-only high-deductible health plan coverage, you can contribute up to $3,250 to HSA in 2013. If you have family high-deductible health plan coverage, you can contribute up to $6,450 to an HSA in 2013. As with IRAs, “catch-up” contributions are allowed – if you are 55 or older, you can put an additional $1,000 in your HSA beyond those limits.

HSAs are similar to IRAs in another way – you can wait until next year’s federal tax deadline to make a contribution for this tax year, if desired. So you can wait to make your HSA contribution for 2013 until April 15, 2014. If you fail to be eligible during 2013, you can still make contributions, up until April 15, 2014, for the months you were an eligible individual. Your employer can even make contributions to your HSA between January 1 and April 15, 2014 that may be allocated to 2013.

Who is eligible to have an HSA? You have to be enrolled in a high-deductible health plan, which may represent all or nearly all of your health insurance coverage. You can’t be claimed as a dependent on someone else’s federal tax return, and you can’t be enrolled in Medicare. Those are the criteria. (P.S.: Thanks to a special “last-month” rule, the IRS considers someone HSA-eligible for an entire year if that individual was on the first day of the last month of a tax year – that’s December 1 for the typical taxpayer.)

HSA funds can also be invested. So given investment gains, ongoing contributions to your account and tax-advantaged compounding, your savings for future health care expenses have the potential to grow impressively.

An HSA gives you a versatile automatic savings plan with striking tax breaks. The contributions to an HSA aren’t taxed by the IRS, since they are made with pre-tax dollars. Distributions usually aren’t taxed either, as long as they are used to pay for deductibles, co-payments and other qualified medical expenses. The IRS also refrains from taxing HSA earnings. This makes the HSA unique among retirement savings accounts.

If you withdraw money from an HSA in retirement and don’t use it to pay for medical costs, the withdrawal is considered taxable income. Even so, your HSA potentially gives you another retirement income source. (If you make such a withdrawal before retirement, you will pay the resulting income tax plus a 20% penalty.)

Interest in HSAs is rising. More and more employers are offering HSAs in tandem with HDHPs, and that may reduce premiums for businesses and employees. As CBS MoneyWatch columnist Ray Martin noted, firms and their workers may see premiums fall as much as 40% with a high-deductible, HSA-qualified plan versus the typical co-pay plan.

A 2013 census released in June by America’s Health Insurance Plans (AHIP) showed 15.5 million Americans are now covered by HSAs – a 15% increase in just the past year, with HSA enrollment tripling in the last six years.

Dollar cost averaging & an HSA. One convenient way to capitalize on the potential of your HSA account is through dollar cost averaging, a contribution method that has less chance of impacting your household budget than the commitment of a lump sum.

You may already practice dollar cost averaging when it comes to your retirement plan contributions. By contributing a fixed amount per pay period (an amount that your budget can handle), you have a steady and consistent flow of new money into the account that can be used to buy shares of whatever fund(s) you prefer. In a down market, you pick up more shares for your money as shares are worth a little less – the advantage being that when the market recovers, you will own more shares that will have increased in value.

In other words, it is wise to treat your HSA like an IRA or 401(k) and practice dollar cost averaging. Doing so today may allow you to accumulate quite a bit of money you can put toward medical costs tomorrow.

Why not get started on making the most of your HSA? Contact the representative of your employer’s plan today for more details on ways to contribute and invest HSA assets. When it comes to retirement and health care, it is always time to think ahead.


About the Independent Financial Advisor

Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.

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