Insurance Needs

Retirement Planning – Health Savings Account (HSA)

January 18, 2022 by Frank

Kiplinger published on January 5 an article by Kevin Webb, CFP, about using HSA accounts to fund retirement.

Déjà vu: Our July 5, 2016 Blog Discussed this Strategy.

When financial advisors write about retirement planning, their focus is usually on 401(k) & 403(b) plans, Individual Retirement Accounts (IRAs) – traditional and Roth, and perhaps non-qualified plans. How often are the overlooked HSA plans mentioned?

What is an HSA?

An HSA is a tax-advantaged way to save money to pay for qualified medical expenses. Generally, most HSA participants contribute the amount of anticipated health care costs they will incur for the year, and then withdraw funds from their HSA account to pay for those medical costs. At the end of the calendar year, if all goes as planned, the HSA account balance is zero as all the funds contributed to it (to lower taxable income) are withdrawn to pay medical expenses.

It is available for people who are covered by a high-deductible health insurance plan. While some high-income earners may find themselves ineligible for a Roth contribution or IRA tax deduction as their earnings exceed stated income ceiling thresholds, HSAs have no income limits on who can contribute.

What is a High Deductible Health Plan (HDHP)?

A HDHP has a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself (your deductible) before the insurance company starts to pay its share.

For 2022, the IRS defines a HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and coinsurance) can’t be more than $7,050 for an individual or $14,100 for a family. (This limit doesn’t apply to out-of-network services.)

Generally speaking, a HDHP best fits those with minimal health care needs. Whereas this group of individuals often dismiss health care coverage and opt to pay-as-they-go since they are healthy, it may be in their best financial interest to go with a HDHP and create an HSA account. As we generally incur more health issues as we age, it is all the more important to take full advantage of an HSA while you can.

HSA owners who wish to maximize the HSA benefits should be able to comfortably pay their medical expenses using after-tax dollars rather than reduce the HSA account balance to pay for those medical bills. The HSA retirement benefits are maximized by investing the contributions for growth and not withdrawing them right away for current medical costs. When they are withdrawn immediately, the account loses one of its three tax benefits (see below), as it is being denied the opportunity for tax-deferred growth.

The Triple Tax Benefits of an HSA

HSAs offer:

Unlike a flexible spending account (FSA) where the contributed funds have to be spent or are lost, HSAs allow account balances to roll over into future years. This makes HSAs an ideal long-term investment account (and medical retirement plan). HSAs provide:

Tax deductions on contributions;

2. Tax-deferred growth; and

3. Allows Tax-free withdrawals if used for qualified medical costs.

Paradigm Shift Needed

Many taxpayers contribute the maximum they can to their 401(k) plan, and with any remaining money, they contribute that amount to an HSA. Perhaps a paradigm shift is needed. Contribute the maximum amount allowed by the IRS to the HSA and contribute the remaining funds to a 401(k) plan. While both 401(k) and HSA plans allow pre-tax contributions, the monies withdrawn from a 401(k) plan are subject to income taxes whereas HSA plans, if properly done, can have those contributions and earnings come out tax-free. If the HSA withdrawals are used to pay for medical expenses, they are free of income tax.

Another benefit of HSA plans are that they do not have any limitations on when a health care expense is incurred and when it is reimbursed. If you maintain those health care expenses that you incurred out-of-pocket while the HSA plan was in effect, you can reimburse yourself for those medical expenses many years later free of income tax. That’s right – tax-free income received in your retirement years. IRS Notice 2004-50 Q&A 39 discusses the rules that govern these distributions.

Unlike qualified retirement plans that dictate when you must begin to take distributions from those plans, there is no such requirement with an HSA plan. You decide when you wish to make those tax-free withdrawals.

Are Death and Taxes Certain?

What happens upon your death? Well, upon the death of the second spouse, the HSA becomes taxable compensation to the beneficiary who receives the HSA.

That is the case unless you make a gift of your HSA plan to a beneficiary who will then receive the same benefits that you enjoyed. While death can not be avoided, sometimes taxes can be avoided.

Tax Tip #1

We suggest you search HSA in the search box of our blog to read prior posts on HSAs and FSAs.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Get Your Umbrella (Policy) Before Disaster Strikes

December 24, 2019 by Frank

Umbrella Policy Is Helpful When You Are Sued and the Dollar Limit of your Original Policy has been Exhausted

Background

If you are sued and the dollar limit of your homeowner’s or general liability policy coverage has reached its coverage limit, an umbrella insurance policy can be used to cover the liability gap coverage. An umbrella policy is most useful to individuals who own a lot of assets or very expensive assets and are at a significant risk of being sued. Some umbrella policies may even include coverage outside of your primary insurance policy.

How Much Coverage Do You Need?

This question should be posed to your insurance agent. Agents often say that you should have enough coverage to protect the value of your assets and you do not wish to see your estate decimated. In a litigious society, knowing your assets are insulated from lawsuits helps add to your peace of mind. Coverage protects yourself from devastating financial loss because of unforeseen events.

Typical umbrella policies range between $1 million to $5 million.

Does Umbrella Insurance Cover All Incidents?

This question should be posed to your insurance agent as to what is not covered. As with any insurance policy, there are typically exclusions for certain type of activities (e.g., using your vehicle for racing or vehicles exceeding a certain weight limit).

Will Umbrella Insurance Cover My Business?

An umbrella policy is a form of personal insurance, so it won’t protect you from lawsuits related to a business you own. Discuss with your insurance agent what type of insurance policies are available to protect your business.

Is Umbrella Insurance Expensive?

Generally, umbrella insurance is not expensive. If purchased from the same carrier that insures your auto or home, reduced premiums may be available.

Planning Tip #1:

Periodically review with your insurance agent(s) that your life, health, disability, umbrella and property insurance policies have enough coverage and that the premium being charged is reasonable.

Planning Tip #2:

Periodically review your living and estate plan with your legal and tax professionals.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Medicare Card Scam

June 5, 2018 by Frank

Medicare Card Scam

Temporary Medicare Card Scam

Although you may not be enrolled in Medicare, you may have family members, neighbors or employees who are, and this is important information that should be shared with them.

Medicare is administered by the Centers for Medicare & Medicaid Services (CMS), a federal agency within the U.S. Department of Health and Human Services (HHS). Due to concerns about ID theft, CMS is mailing to all Medicare recipients a new Medicare ID card. This has been a year-long project to hopefully deter ID theft of Social Security numbers (SSNs). Despite the headlines of major companies who have had data breaches, many of the ID thefts have originated in the medical industry (e.g., doctors’ offices, hospitals). To help combat ID theft, an important step [Read more…] about Medicare Card Scam

The Medicare Coverage Trap

July 25, 2017 by Frank

Do not fall into the Medicare coverage trap!

Let’s look at a hypothetical situation. You find yourself retiring and your employer has a very good medical plan. Rather than signing up for Medicare (Part B) which covers the cost of healthcare services like regular physician visits, outpatient surgeries and diagnostic procedures, you decide to go on COBRA to keep your employer’s great health care benefits.

Eventually you notice that your employer’s plan has begun to reject your medical claims. Since you have religiously been paying your COBRA premiums in full and on time each month, you call the employer’s health care provider to inquiry why it is not paying your medical claims. You learn [Read more…] about The Medicare Coverage Trap

PA Filial Law and Long-Term Care Insurance

July 18, 2017 by Frank

With the demographically large baby boomer generation moving into retirement, we may see an increasing number of people without the financial resources to support themselves in their golden years. What if these “retirees” do not have the financial resources to pay for the cost of health care, long-term care, or nursing care?

As we discussed in our July 2, 2012 post, YOU may be liable for your relatives’ unpaid bills.

How is this possible? You can become liable for the health care bills of your family members due to [Read more…] about PA Filial Law and Long-Term Care Insurance

Small Business Sponsored Health Reimbursement Accounts Now Allowed

March 28, 2017 by Frank

Prior to tax years beginning January 1, 2017, employers who reimbursed employees for the cost of premiums for individual and family health coverage were subject to the Patient Protection and Affordable Care Act (ACA)’s excise tax. This is because the IRS took the position that group health plans that reimbursed or paid employee premiums for individual coverage were subject to an excise tax (up to $100 per affected individual per day) for violating the group plan rules. Under transition relief, small employers were temporarily exempted from excise tax from January 1, 2014, to June 30, 2015.

Under the pre-2017 rules, if an employer desired to help employees pay for health care coverage and avoid the onerous excise tax, those monies had to be paid to the employees and included in their W-2s as compensation. The employees could then use those “reimbursement” monies to pay for health care coverage or for any other purpose.

For tax years beginning after December 31, 2016, [Read more…] about Small Business Sponsored Health Reimbursement Accounts Now Allowed