Health Savings Accounts – Know Your Options When it Comes to Medical Bills

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Medicare has been key in helping retirees mitigate healthcare costs, but some may still have to pay substantial sums from their own pockets. One may consider supplementing Medicare benefits with a health savings account (HSA) accordingly. Americans age 65 and older are still paying, on average and after Medicare, $4,300 for medical expenses every year per the Center for Retirement Research at Boston College. It may behoove us to remember these expenses as we manage our self-directed investments and plan for our futures. An HSA can be a valuable tool in doing so.

HSAs are individual custodial accounts that allow investors to hold the same alternative investment options as self-directed IRAs. However, instead of helping you build an overall retirement nest egg, HSAs enable you to generate a pool of cash and assets that can help cover qualified medical expenses (QMEs). You, as the HSA holder, can experience considerable tax advantages in the process.

You may deduct HSA contributions from your income for an immediate tax benefit, just as you may with a Traditional IRA. Single high-deductible health plan (HDHP) participants may contribute up to $3,500 in 2019 ($3,450 in 2018), while family HDHP participants may contribute up to $6,900 ($6,850 in 2018). HSA holders may contribute an additional $1,000 per year if they’re age 55 or above. So, if a single HDHP holder below the age of 55 earns $75,000 in a given year, she could pay taxes on only $71,500 by making a $3,500 contribution to her HSA.

HSA contributions can make for happier tax returns, but the true beauty of HSA investing lies in making qualified withdrawals. HSA distributions can be 100% tax-free, regardless of the HSA holder's age, if they either cover QMEs directly or reimburse the HSA holder for QMEs that have been paid for out of pocket (but only if the QMEs were incurred after the HSA was opened). If we continue with our previous example, let’s say our single HDHP holder makes her $3,500 contribution and grows her balance to $5,000 with alternative investments. She then sustains an unfortunate injury and needs that $5,000 to help pay her hospital bills. She can withdraw the full $5,000 balance without paying any taxes on the $3,500 tax-deferred contribution or the $1,500 in earnings.

In many ways, HSAs combine the most favorable elements of other self-directed retirement plans. You can enjoy recurring annual benefits by making tax-deferred contributions and the long-term benefit of tax-free withdrawals. Essentially, HSAs afford the unique opportunity to cover medical expenses with money that hasn't been taxed.

This may seem too good to be true; you may think the list of QMEs is full of obscure medical occurrences that you’re unlikely to ever endure, but that’s not the case. Annual physicals, prescriptions drugs, and eye care (exams, contact lenses, glasses) are among the many QMEs that an HSA can help pay for. You must be enrolled in an HDHP to open an HSA, but your deductible is another QME that your HSA can cover.

Medicare may only go so far once you reach retirement age. As such, you may want to think about whether or not a self-directed HSA could be right for you. For more information about HSAs or alternative IRA assets, please don’t hesitate to contact New Direction Trust Company at 877-742-1270 or info@ndtco.com.

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