Health Savings Accounts: Tax-exempt Life Savings

Investments preserve the value of wealth. No more precious possession does a person hold than health, because health affects the quality of life, the one irreplaceable asset. Food, shelter and clothing were once the necessities of survival. But now survival within human society that dominates the habitable and productive areas on Earth means transacting with others for those necessities.
To the list of essentials for survival must be added transactional healthcare, and society demands that individuals provide for their physical welfare via health insurance. But just as making mortgage payments rather than paying rent makes sense, so does providing for healthcare in the most financially sound manner. Contributions to health savings account (HSA) are tax-deductible, grow tax-deferred and can be distributed tax-free. An individual investor does not need to itemize expenses in order to deduct contributions or take tax-free distributions.

HSA

Everyone must have health insurance, but those who are financially secure may have the resources to cover unexpected medical emergencies themselves, without insurance, and thus may opt for the lower monthly premiums of a high deductible health plan (HDHP). Those who choose an HDHP have the option to save for future medical expenses with a tax-exempt health savings account (HSA). Like an individual retirement account (IRA), an HSA allows for tax-deductible contributions, tax-deferred growth, and transfer upon death to a named beneficiary. Unlike an IRA, qualified distributions from an HSA are tax-exempt.

As a mortgage builds wealth by increasing home equity and allowing a tax deduction, and as a retirement account both builds a secure future and defers taxes, so a health savings account is a tax-deferred savings account as well as a tax deduction for the contributor. But unlike other methods of tax-advantaged savings and investment, an HSA allows tax-exempt withdrawals, making an HSA a fully tax-exempt financial path for money to flow unencumbered from earnings through to eventual expenses. HSAs, also like IRAs, have named beneficiaries, so the account can survive with its tax-exempt status beyond the life of the owner.

For 2019, an individual investor may contribute $3500 per month with an additional $1000 allowed for those over 55 or older. A couple with family medical coverage may contribute a monthly maximum of $7000, or $9000 if both contributors are over age 55. So a couple, both aged 55 or older can make an annual tax-deductible contribution of $108,000 to an account that grows tax-deferred and can be accessed tax-free.

Qualified HSA Funding

A one-time tax-free transfer from a qualified retirement account can be used to offset large and unexpected medical expenses. A taxpayer who wishes to start an HSA can fully fund its first year with an untaxed transfer from a retirement account. That same couple, both 55, could fund an HSA with a qualified HSA funding distribution of $108,000. If they were to continue their savings until they qualified for Medicare at age 65 and stopped, they could then enroll in Medicare and use their tax-exempt distributions to pay its premiums. They could no longer contribute to an HSA while enrolled in Medicare, but their HSA could also pay their medical bills, expenses and long-term care insurance.

Distribution

Distributions from health savings accounts are tax-free as long as they are used for qualified medical expenses. A taxpaying HSA owner does not need to itemize expenses in order to take advantage of the tax-exemption for HSA distributions. Most expenses that qualify as medical deductions on IRS 1040 Schedule A also qualify as tax-exempt distributions from an HSA. The HSA owner will need to document unreimbursed expenses for tax filing. Qualifying medical expenses include:

  • Medical Expenses
  • Examinations, Maintenance and Treatment
  • Hospital, Nursing and Long-term care.
  • Surgery including vision correction
  • Health Insurance
  • Medicare Part B
  • Medicare Part D
  • Long-term care Insurance
  • Transportation and Lodging

HSAs like IRAs may be electronically transferred between tax-qualified accounts an unlimited number of times, but also like an IRA, a rollover is limited to once per year. HSA withdrawals distributed directly to the account holder may be re-deposited, rolled over, into another HSA within 60 days without triggering a taxable event.

Like IRAs, HSAs also have designated beneficiaries who receive access to the HSA immediately upon the death of the owner. If the beneficiary is the owner’s spouse, the account remains a tax-exempt HSA. A beneficiary other than the owner’s spouse will have a taxable event in the year of the owner’s death, whether that beneficiary is a person or the owner’s estate.

Life, Health and Wealth

Like food, shelter and clothing, healthcare is necessary for survival, but savings for healthcare can preserve wealth as well as health. A health savings account allows income to flow tax-free from earned income to eventual expense and appreciate while invested. One precious life is allotted to each customer born on this singular planet, and investing to preserve its quality is fundamental.

Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC

All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as investing advice of any kind, legal or tax advice and/or a legal opinion. Always consultant a financial, tax and/or legal professional regarding your specific situation. There can be no assurance that any investment product or strategy will achieve its investment objective(s). There are risk associated with investing, including the entire loss of principal invested.