A new, higher contribution limits for health savings accounts for 2020 has been announced by the Internal Revenue Service recently. To save courtesy of Uncle Sam, HSAs are the best way to do that with triple tax benefits. On a tax-free basis, you can put money in usually through salary deferrals, invest it as it builds up tax-free, and it covers out-of-pocket healthcare expenses after it comes out tax-free. Using your account is completely up to you so make sure you use it wisely.
You can contribute $3,550 for individual coverage in 2020, up from $3,500 for 2019, or $7,100 for family coverage, up from $7,000 for 2019. You can put away an additional $1,000 a year if you’re at the age of 55 and above. The inflation adjustments don’t include that catch-up amount.
Are you in a qualifying high-deductible health plan? Then you can contribute to an HSA. This only means for 2020, a plan with a minimum annual deductible of $1,400 for individual coverage or $2,800 for family coverage.
You should be able to contribute enough to have your deductible covered at a minimum. If you’re facing a doctor’s bill that you weren’t expecting, you can put money into your HSA, take it right out, and 25% of the bill has just been paid by the government. Obviously, you’ll get even bigger savings when you’re on a higher tax bracket.
But using an HSA as a retirement savings kitty is actually the real deal. For as long as you or a surviving spouse eventually use the money for medical expenses, you can invest and let it grow for many years free from taxes. Furthermore, if you ever needed an emergency cash money, HSA can serve as a back-up on those rainy days. You can do this by taking money out tax-free to reimburse yourself for any previous years of medical expenses paid from outside the account. You can also withdraw money for non-medical uses once you turn 65 and pay the same tax as you would on withdrawals from a pretax 401(k).
According to HSA advisory firm Devenir, Americans held $60 billion in 26 million HSAs with an average of $2,300 per account when the month of January ends. It is offered as an employee benefit for most HSAs. But there are those that offer fee-free individual HSAs for self-employed folks and job hoppers specifically Fidelity Investments and a fintech newcomer, Lively.
Paul Fronstin, the director of health research at the Employee Benefit Research Institute said at the Institute’s spring policy forum that most people are rolling over money and builds up an account balance even though they are taking distributions. It’s actually a smart move.
There is however a costly mistake seen from HSA owners based on evidence. People are more likely to spend their HSA dollars on low-value services after reaching their deductible. Since some of these low-value services are potentially harmful, this becomes a problem. For example, the increased imaging for back pain within the first six weeks. Additionally, after the deductible is met, the use of preventative services also jumps. Fronstin’s advice is to engage people before and after they reach their deductible to get things right.
To find the lists tests and treatments appropriate for specific conditions and to purposely spur conversations between doctors and patients, check out the American Board of Internal Medicine’s Choosing Wisely Campaign.
You can also find more information on how to maximize your HSA and health care spending by doing more research. It really helps to keep on learning and have a game plan if you’re hoping to build retirement wealth in a health savings account. Try to start focusing on using your HSA for retirement savings by age 50, maximize your contributions according to your marital status, invest more, avoid dipping into savings, and always mind your retirement decisions. These are some of the major things you can do to make sure you’ll live comfortably or even better, live a luxurious lifestyle once you retire. The bottom line is that it's always best to plan your HSA contributions accordingly.
YourIRSTaxAdvocate.com