February 5, 2018

WTOP Interview: 7 Things You Need to Know About Health Savings Accounts

LISTEN NOW! HSAs offer tax advantages and other benefits. Here's how to maximize this unique savings opportunity.
Dawn Doebler, CPA, CFP®, CDFA®

Interview Transcript:

Shawn Anderson: Almost 1/3 of employees in the US are covered by health savings accounts. These HSAs hold more than $40 billion in total assets, getting more popular because of the potential tax savings they provide when you use them for medical expenses.

Hillary Howard: Joining us live, Dawn Doebler co-founder of Her Wealth and Senior Wealth Advisor at The Colony Group. Hello Dawn!

Dawn Doebler: Hi Hilary.

Hillary: For those of us who may not be familiar with health savings accounts, give us the basics.

Dawn: Well as Shawn said, HSAs provide tax benefits in exchange for using the account to pay for qualified medical expenses and they can be a really great way to boost retirement savings. You do have to qualify and the way you do that is you participate in the High Deductible Health Insurance Plan. And for families, that means your health insurance has to have an annual deductible of at $2,600 and total out of pocket expenses are no more than $13,100. And if you're not sure if you qualify you can simply ask someone at work who administrates your plan or talk with your insurer directly. But there really are several advantages to an HSA and they are fairly new, so a lot of people aren't yet aware of them. 

There are no income limits, so just about anyone who participates in a qualified health plan can contribute. The contribution do you make are tax deductible, so that means you can reduce your taxable income, savings can be invested, so they can grow tax free and company sponsored plans often have a match and that's really free money to you if you contribute. There are contribution limits, so you have to be aware of those and there's also a $1,000 catch up if you're over age 55, so you can catch up as you get closer to retirement.

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Shawn: Give us an idea of what kind of medical expenses are covered through these?

Dawn: Well you do want to be aware of what expenses qualify because if you're under age 65 and you use the funds for something that's not qualified, you can be subject to a penalty of 20%. So, there's a complete list of expenses in the IRS code, there's a link to that in our article on wtop.com, but some of the qualified uses include co-pays on prescription drugs, hearing aids, COBRA premiums and actually lesser known home modifications made for medical purposes and of course all of these expenses can be substantial when you get into retirement. 

You cannot pay for medical insurance premiums with an HSA though and we want to make a comment that tax deferred growth and of course the tax free withdrawal can lose the impact if you dip into the account too soon. So, we usually suggest people maximize their contributions as long as possible, invest the money and then avoid using the account until they get closer to or in retirement.

Hillary: Are there any special circumstances we need to know about regarding these accounts?

Dawn: Yeah there are some special rules, particularly when you reach age 65, the contribution rules can get complicated, so you want to be careful. Certainly you can still withdraw funds but it's more difficult to contribute funds if you are 65 or older. I also want to comment that if you're getting a divorce, if there are HSA assets, those should be included in your divorce settlement, those can be split like an IRA account and transfer tax free, if it's according to a court order. And of course there's ongoing debates with all of our tax laws which are changing, so we think that's a really good reason for people to be maximizing their HSA contributions now, investing the account, saving and perhaps planning to use it in retirement years.

Shawn:  Alright, very good. Thanks Dawn. Dawn Doebler, with The Colony Group, you can read more on wtop.com, search Her Wealth.

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Dawn Doebler, CPA, CFP®, CDFA®

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.