We recommend that you fund your Health Savings Account (HSA) to the maximum limit each year and that you keep funding it to the maximum as long as you can no matter how much money you have in the account.
Funding your HSA to the maximum has many advantages and few disadvantages. The primary reason to have HSA compatible health insurance is specifically to be able to fund your HSA to the maximum. You will likely use your entire HSA balance in your lifetime. It can help provide a tax efficient way to self-insure for long-term care. And it can function like an IRA with no required minimum distributions.
After funding your HSA, we recommend that you invest the portion of your HSA in excess of your annual deductible in an all-stock portfolio.
An HSA is a rare type of account where you can get a tax deduction when you put the money in and then still pay no tax when you take the money out for qualified medical expenses. Those expenses include Medicare Part B premiums, dental care, vision, and co-payments.
Then, after age 65, you are allowed to take money out of your HSA for any reason, although withdrawals for non-qualified medical expenses are subject to income tax. In this regard, at its worst, your HSA acts like a traditional IRA, receiving an income tax deduction on the way in and being subject to income tax on the way out.
Withdrawals that are for qualified medical expenses are not subjected to income tax, and, after age 65, you can even use your HSA to pay for some insurance premiums, including Medicare parts A, B, D, and Medicare HMO premiums. If your Medicare premiums are automatically deducted from your Social Security check, you can also reimburse yourself from your HSA.
Sadly, if you are enrolled in Medicare, you are no longer eligible to contribute to your HSA although you can continue to use an HSA you already have. Normally, people enroll in Medicare at age 65, and there are stiff penalties for enrolling later. The year in which you enroll in Medicare, you lose eligibility to contribute to your HSA the first day of the month you turn 65. If you turn 65 on September 15th, you are no longer eligible to contribute to your HSA as of September 1st. Since you were only eligible for 8 months out of the year you are only allowed to contribute 8/12ths of the allowable limits. This partial contribution can be made retroactively after you have lost eligibility.
People with group health insurance through their employer generally do not have to sign up for Medicare when they turn 65. And if you have not enrolled in Medicare you are eligible to continue contributing the full amount to your HSA.
Unlike traditional IRAs, HSAs are not subject to required minimum distributions. Upon your death, your spouse can inherit the HSA tax-free as an HSA. Your HSA can also pay for qualified medical expenses incurred on your behalf up to a year after your death, but these do not include funeral expenses.
When an HSA is left to a non-spouse however, the account stops being an HSA. The value of the account becomes taxable to the beneficiary. If the beneficiary is your estate, the value is included in your final income tax return. If the beneficiary is an individual, they must include the value on their income tax return. Unlike a traditional IRA, which can be taken out gradually over a number of years, the entire value of an HSA will be taxed for a non-spouse beneficiary in the year it is received. This is the main disadvantage of an HSA over a traditional IRA.
In 2019 the maximum allowable contribution is:
|2019 HSA Limits||Under 55||55 and Older|
You can contribute the additional $1,000 catch-up contribution so long as you turn 55 before the end of the year.
Photo by Mika Matin on Unsplash