Regrets, I Have a Few – The Health Savings Account

Health- Medical and Financial

I have a few regrets from my financial past.  Most of my regrets are centered on not taking advantage of tax advantaged opportunities earlier, due to my lack of knowledge.  Amazingly, as I grew older and wiser, we sought ways to reduce our Adjusted Gross Income and our tax exposure.  I want to highlight today a big regret of mine, which is not getting started earlier with a Health Savings Account (HSA), which the federal government made a available in 2004. 

Aside from getting employer matching funds from 401K contributions, I believe that HSA’s are the best type of “retirement” account to contribute to. HSA’s offer tax-free contributions with investment growth, while withdrawals for qualified medical expenses are also tax-free. In other words, as long as you use the money to pay for qualified medical expenses, you never pay tax on the money. On top of that, if you don’t use HSA funds for medical expenses, you can withdraw them in retirement, for any purpose, just as you can for an IRA, without penalty, starting at age 65.

The Numbers – Maximum Annual Contributions

  • Individual Plan: $3,500 (+ a $1,000 “catch-up” contribution if age 55+)
  • Family Plan: $7,000 (+ a $1,000 “catch-up” contribution if age 55+)

These are top line credits, and not simply a reduction in your AGI. 

An example

Our first exposure to an HSA was when Mrs. FIREd Up was offered this option at an employer in the late 2000’s. Be aware that not all employers offer a High Deductible Health Plan, so when you get the opportunity to participate, it could be something to seriously consider. 

The biggest benefit, at that time, was her employer funded the account to get her annual health plan deductible covered, with no strings attached.  Mrs FIRE’d Up contributed to the HSA with each paycheck, but the fact that she was in this position for only a year, the balance did not grow to a substantial amount.  We did benefit from having the funds over the following years, for medical expenses, until the account was exhausted.   Having little knowledge beyond the basics of the HSA, we did not fully take advantage of the impact the tax deduction would have had on our AGI.  Over a few years time, we exhausted the account to zero. 

Fast forward about 10 years, with the opportunity to take advantage of this option by using a “High Deductible Health Plan again, we revisited how we could leverage this option to it’s fullest.  Since we are largely healthy, with only office visits and the occasional prescription, our out of pocket costs for annual medical expenses, are low.  The premium costs associated with a High Deductible health plan are substantially lower than a traditional health plan, making the High Deductible Health Plan appealing for those who are largely healthy.  This, coupled with the “top line” tax deduction, make for an appealing option. 

Rollover- Traditional IRA to HSA

The IRS allows a Rollover from an IRA to the HSA, once in your Lifetime, equal to the annual maximum contribution.  The benefits are not as good as you might imagine, however.  You have to be HSA eligible with a High Deductible Health Plan, and remain so for 12 months following a Rollover.  Additionally, if your rollover is equal to that maximum allowable contribution, you lose the opportunity to get the additional tax deduction to reduce your AGI in that tax year.  In other words, you can not do a maximum amount rollover and a separate maximum contribution in the same year.  So, be careful if you wish to consider this option. 

Most will Not Benefit from an HSA to IRA Rollover

Due to the restrictions, a Traditional IRA to HSA rollover may make sense if the following conditions exist. 

  1. You are HSA-eligible in a given year.
  2. You remain eligible for at least 12 months after making the rollover.
  3. The rollover funds come from a Traditional IRA and not a Roth IRA.
  4. You want to access the HSA funds right away for HSA-qualified expense withdrawals.
  5. There is no other way possible to increase your HSA contributions for that given year from any other funding source (and keep in mind, you can contribute to an HSA outside of an employer payroll deduction).

For more info on the IRA to HSA qualified funding distribution tax rules, see IRS Publication 969, Health Savings Accounts.

Self Directed HSA

Similar to opening a Self Directed IRA account, you can open a Self Directed HSA to control the investments you direct the money to.  As an example, you can invest the money in Real Estate such as house flip, rental property or a Mortgage etc. 

Interested in a Self Directed HSA see Equity Trust Company at: https://www.trustetc.com/self-directed-accounts/other/hsa

Judgement proofing your assets

Another huge benefit to a Health Savings Account, is the asset protection provisions the IRS and nearly all states afford to these accounts.  The IRS states:

Except as provided in subsection (c), any funds or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan which is qualified under §§ 401(a), 403(a), 403(b), 408 and 408A, or an Archer medical savings account qualified under § 220 or a health savings account qualified under § 223 of the Internal Revenue Code of 1986, as amended, are exempt from any and all claims of creditors of the participant or beneficiary, except the state of Tennessee. All records of the debtor concerning such plan and of the plan concerning the debtor’s participation in the plan, or interest in the plan, are exempt from the subpoena process.

In today’s litigious society, the more asset protection you can create, the better we sleep at night.

To your healthy FIREd Life!

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