As you plan for retirement, consider using one of the best options for building tax-advantaged savings – a Health Savings Account (HSA). An HSA is a medical savings account available to anyone enrolled in a high-deductible health plan (HDHP). Account funds grow tax-free until withdrawn, and as long as the money is spent on qualified expenses, withdrawals are also tax free. Since most people will face substantial medical expenses in their later years, an HSA is a great option for supplementing IRAs, 401ks and other tax-advantaged retirement accounts. Below are some frequently asked questions regarding this strategy.

How much can I contribute to my HSA?

In 2019, annual contributions are capped at $3,500 for an individual and $7,000 for a family.

Individuals over 55 may contribute an additional $1,000 per year. The annual maximum HSA contribution will change each January 1 based on the Consumer Price Index (CPI).

Note: The maximum H.S.A. contribution includes both employer + employee contributions.

How will an HSA affect my taxes?

HSA contributions are made on a pre-tax basis, whether by yourself, your employer, or someone else. You can withdraw the money at any time, and distributions are also tax-free, as long as you spend the money on qualified medical expenses, incurred after the HSA was established.

Tax Treatment of Contributions & Distributions to HSA and IRA Accounts

What is a qualified withdrawal?

“Qualified” medical expenses include deductibles, fees and other health care expenses on behalf of yourself, your spouse, and any dependents.. There is no time limit for claiming a reimbursement from your account, but you’ll need to document your expenses when you claim them.

Can I withdraw money to pay other expenses?

Nonqualified withdrawals are permitted at any time, but will be included in your taxable income. If you are under 65, you will also pay a 20% tax penalty. That penalty is waived if you are totally and permanently disabled or for withdrawals made after your death.

Can an HSA be used to pay insurance premiums?

Generally, no, funds from your H.S.A. may not be used to pay insurance premiums. However, there are a few exceptions where you can use your H.S.A. to pay for the following:
■ Long-term care insurance
■ Health care continuation coverage (such as coverage under COBRA)
■ Health care coverage while receiving unemployment compensation under federal or state law
■ For those over age 65 – Medicare Advantage premiums, as known as Part C (note – you cannot use your H.S.A. to pay for a Medicare supplemental policy or Medigap policy)

Do HSAs include fees?

Yes, and they vary from plan to plan. We have found that Fidelity Investments offers the most competitive H.S.A. Below is a list of benefits the Fidelity H.S.A. currently offers:
■ Opening Fee: There are no account opening fees or transfer fees.
■ Minimum Balance: There is no minimum balance to open a Fidelity HSA.
■ No monthly or annual maintenance fee and there is no minimum balance that must be held in cash.
■ One integrated account; no transfers back and forth between different entities.

Do HSAs come with investment options?

Many plans offer investment options. At Fidelity, all of the investment options available in a regular Fidelity brokerage account are also available within their H.S.A.s, including commission-free low-cost index funds.

How can I use my HSA to save more for retirement?

Begin by fully funding your account each year. Many people use HSA funds to cover current medical costs. This provides an immediate tax savings. However, if you can afford to pay current medical expenses out of pocket, your HSA balance will continue to grow, tax-free. This effectively increases your retirement savings and your tax savings.

How much will I need to save for health care during retirement?

Consider Fidelity Investments’ latest estimate of retiree health care costs — $275,000 for a 65-year-old couple retiring in 2017. An HSA could allow the couple to fund much of those costs tax free, without using other accounts.

Does this strategy make sense for everyone?

For some people, paying current medical costs out of pocket may be challenging. The deductible alone could be several thousand dollars, with fees and co-pays adding thousands more. But for people who are young, healthy, or wealthy, this strategy is especially appealing.

■ Young people have ample time for the HSA funds to grow over years, or even decades.
■ Healthy people, with lower medical bills, will have more disposable income to contribute to their HSA.
■ For wealthy people, with the ability to pay current medical costs and fully fund their retirement savings, an HSA provides the best option for accumulating tax-free funds.

Remember that no other retirement vehicle gives you tax advantages on both contributions and distributions. However, if you do use your HSA to supplement your retirement funds, it’s important to invest in assets that will grow over time – similar to your IRA. Using cash accounts or other low-return investments will diminish the HSA’s advantage. If you have questions about HSAs, or if you’re interested in how an HSA might fit in to your retirement strategy, your Paracle advisor would be happy to discuss your options.

SUPPLEMENTAL Q+A

Do I need earned income in order to contribute to a HSA account?
No. Contributions may be made by you, or on your behalf, even if you are retired, have no income, or your income is less than your contributions.

Are employer contributions to HSA taxable income?
Generally, contributions made by an employer to the health savings account (HSA) of an eligible employee are excludable from an employee’s income and are not subject to federal income tax, Social Security or Medicare taxes.

Can both spouses make a catch-up contribution?
If both spouses are eligible individuals and both spouses have established an HSA in their name and turn 55, then both can make catch-up contributions. If only one spouse has an HSA in his or her name, only that spouse can make a catch-up contribution.

If I am turning 65 this year, can I still make an HSA contribution?
Once you enroll in Medicare, you may no longer contribute to your HSA. You may be eligible to make a prorated contribution during the year you turn 65 before you enroll in Medicare.

Is there a deadline to make contributions to an HSA account?
Yes, yearly contributions should be made by your tax filing deadline, generally April 15 of the following year.

How does a spouse’s health coverage impact contribution limits?

If you have an HSA, but your spouse has separate health coverage, the following special rules may apply:
■ If your spouse has an individual HSA-qualifying plan, then you would have to subtract your spouse’s contribution from the maximum that you could otherwise contribute.
■ If your spouse has non-qualifying family coverage that includes you, it makes you an “ineligible individual”, and you may not contribute to an HSA.

Can I transfer my IRA into an HSA?
Yes, the law allows a one-time transfer of IRA assets to fund an HSA. The amount transferred may not exceed the amount of one year’s contribution and individuals must be otherwise eligible to open an HSA. Transfers are not taxable as IRA distributions. However, amounts transferred into an HSA from an IRA are not deductible.

Are HSA funds portable?
The plans are portable, and can be rolled over year after year (no “use it or lose it”). Only one rollover can be completed in a 12-month period (where assets are sent to the account holder directly), but there is no limit on the number of trustee-to-trustee transfers you can make.

Can I use my HSA to pay for other elective procedures?
A partial list of items that you can include in figuring your medical expense deduction can be found IRS Pub 502.

Can I use the money in my HSA to pay for medical care for a family member?
Yes, you may withdraw funds to pay for the qualified medical expenses of yourself, your spouse or a dependent without tax penalty.

Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Paracle Advisors does not offer legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter. Paracle Advisors is an investment advisor registered with the Securities and Exchange Commission.