I’m often hearing high-income earning, busy professionals asking about strategies to sock away more money into investments, while simultaneously reducing their taxes. It’s the ultimate “have your cake and eat it too”. Most of those high-income earners might expect me to say “don’t we all want that?” in a snarky, rhetorical voice. But the truth is that the seldom charitably inclined Internal Revenue Service does allow you to truly “have your cake and eat it too”! It’s called the Health Savings Account.
So, if the IRS allows such a thing, why aren’t you utilizing it to its full benefit. When talking to new clients, I tend to hear the same 3 reasons to not getting the maximum benefit from this rich serving of dessert.
1. You simply didn’t know about it.
Do you know when your company sent you the information about your benefit options? The answer is when you first were hired and it was sent in a 60 plus page benefits package handbook in a language foreign to most. All you really cared about is whether or not your salary, commission and bonus structure is what they really said it was. Everything else was checked yes or no based upon if it made even the slightest sense to you. I get it, I was there once too.
2. You didn’t understand the difference between a Flexible Spending Account (FSA) and a Health Savings Account (HSA)
There are similarities between the two types of accounts, but hands-down the HSA is the one with the heavy-weight title belt. An FSA is absolutely a good tax-favored savings vehicle, but limited in a couple of ways. The biggest limitation being that you must use the funds inside of the FSA each year, by March 15th of the following calendar year. Similar to car insurance, it’s a use-it-or-lose-it investment. It will make you feel safe and it will protect you, but mostly like your ante on a losing hand.
I’ll get into the benefits and features of the HSA in a few short paragraphs.
3. You don’t place much value on savings for medical expenses versus making investments in retirement accounts.
Hear me out. You love the idea of contributing to a tax-advantaged retirement account. I’m guessing the reason is to save so that one day you can retire and kick that energy-sucking job to the curb. Your retirement account will serve the purpose of providing the money needed to sit on the beach with a pina colada in the Caribbean or finally have the time to hike the Pacific Crest Trail (because this is what we think about at 35…not 65).
The reality is the average couple retiring in 2019 at age 65 will need $285,000 to cover health care and medical costs in retirement. Increase that cost by current inflation rate of healthcare costs at 4.91% year-over-year. How confident do you feel that your retirement account will be adequate enough?
The savings of an HSA may seem small or insignificant to some high-earners with contributions limits of $3550/year for individuals and $7100/year for families (additional $1000/year catch for those 55 years of age and up). However, keep in mind that even though you have high income to pay those expenses now, you will really need medical funds when you retire. So, think of your HSA as a long-term retirement plan to cover your future costs.
So, let’s go back to the basics. What is a Health Savings Account?
Health Savings Account (HSA)
An HSA is an account that is triple tax-free. Meaning, that contributions going in are tax deductible on your tax return, the account can potentially grow tax-free, and qualified withdrawals for medical expenses are tax-free. It really is a thing of beauty!
The catch is that you must participate in a high-deductible health insurance plan (HDHP). However, as a high-income earner, you should already be participating in a HDHP as you would have cash on hand to meet the deductibles. To qualify as a high-deductible plan, deductibles in 2020 are $1400/year for individuals and $2800/year for families.
The IRS is offering up tax-savings and a retirement hedge against some potentially nasty unanticipated expenses that could blow up those dreams of margarita sippin’ while listening to the seagulls overhead.
If you are wondering where the HSA should stand in comparison to other savings account, then check what I wrote HERE. You should always look to the tax-incentives offered by the type of account and right now there is only one account allowed to be the elusive triple-tax free- And that is a cake too sweet to pass up!
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