As open enrollment for health care plans nears, one option people have is to open a health savings account if they have a high-deductible health care plan. People whose health care plans have an annual…
As open enrollment for health care plans nears, one option people have is to open a health savings account if they have a high-deductible health care plan.
People whose health care plans have an annual deductible of $1,350 for individuals and $2,700 for families have the option to enroll in an HSA. Individuals can sock away up to $3,450 annually in an HSA, while families can save up to $6,900. For people over 55, they can contribute another $1,000 annually.
Like a flexible spending account, people can shelter money for qualified medical expenses tax-free, but unlike flexible spending accounts where users need to spend all of the money in a calendar year, unused funds in an HSA can be rolled over annually. Those funds can grow tax-free, and any withdrawals aren’t taxed either, if used for qualified medical expenses.
HSAs also have investment options, such as stocks, mutual funds, exchange-traded funds and other investment vehicles, making them another sheltered investment account like a 401(k) or a traditional individual retirement account.
Financial planners laud the investment aspect of these accounts, but users might be torn. After all, accounts like these are to help defray the cost of a high-deductible medical plan, which is short-term spending, but the investment aspect of any savings plan should have an eye on the long term. Because of that dichotomy, financial experts offered some tips of how to balance these two needs.
Consider your income level. Shomari Hearn, managing vice president and a certified financial planner at Palisades Hudson Financial Group in Fort Lauderdale, Florida, says he understands the conflict an HSA user might have when deciding how to use the account.
“It can be hard to determine how best to approach it from an investing standpoint,” Hearn says.
Oscar Vives Ortiz, wealth strategist and a certified financial planner at PNC Wealth Management in Tampa, Florida, says people who are on a lower-income scale probably won’t look at HSAs as investment vehicles since they’re likely to need the dollars to pay for medical expenses annually.
Even in that case, Ortiz says, HSAs are still worth having.
“I think it is still advantageous to use the HSA for the tax deduction … and to the extent you can afford it, contribute the full amount,” he says.
Think short term and long term. Hearn says because of the investment options available in HSAs, people need to think about short-term and long-term needs. He says he advises clients who have HSAs to approach their investment decisions like any other — when are you going to need this money?
“Any money that they anticipate they are going to need to withdraw within the next five years should not be allocated toward equity or equity-type investments due to the fact that there’s too much volatility in the market,” he says.
That means using conservative investments like bonds or other fixed-income. One of the benefits of the HSA account is the ability to rollover unused funds. Hearn says once a person can get up to $15,000 of rolled over money in their HSA, then they can take that portion and start investing for the long-term.
Jeffrey Corliss, executive director of RDM Financial Group at HighTower in Westport, Connecticut, says when thinking about contributing to an HSA, review your medical expenses from the past year to get a feel on what you might spend the following year and try to put at least that much in. And if at all possible, try to pay for medical expenses out of pocket to let the HSA money grow tax-free.
But he understands that’s not always feasible. Corliss says people who can only fund a flexible spending account or an HSA should lean to putting the money in the HSA.
“You may have one year where you don’t end up spending all of your money,” he says. “That way you can let it grow rather than having to spend it all [in a flexible spending account].”
The tax breaks make it worthwhile to open an HSA, says Dean Hedeker, principal of Hedeker Wealth, a wealth management and financial planning firm in Lincolnshire, Illinois. When trying to decide how to earmark the money, he also suggests putting the money you’re likely to need annually in a bond fund in case it needs to be withdrawn and the rest in equities, if possible.
Given the changes in the tax code which make it unlikely people will be able to itemize deductions when they file their annual taxes, an HSA is one of the few ways average people can shelter some funds from the tax man.
The sources say even if it takes some time to build enough funds to earmark into equities for long-term holdings, it’s worth it to be able to tap that money in retirement when health care expenses will likely be much higher.