Here Are the States Whose Residents Are Really Best at Managing Their Money
As recently reported by CreditCards.com, the state whose residents are best at managing their money...
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For people with very low health costs, HSA eligible healthcare plans are almost a no-brainer, especially in situations where their employer contributes to their account to help offset the deductible (like mine does).
If you don’t spend that money, it’s yours to keep and rolls over year after year for when you do eventually need it, perhaps in retirement to help pay Medicare Part B or long-term care insurance premiums.
But HSAs can still be a great deal even if you have higher health costs. I reached the out-of-pocket maximum in my healthcare plan a few years ago, and yet I continue to choose the high-deductible plan solely because I want the ability to max out the HSA contribution.
People looking for any way to reduce taxable income appreciate the ability to exclude up to $7,100 in 2020 per year from taxes for family coverage (plus another $1,000 if turning age 55 or older), even if they end up spending the entire amount each year.
It beats the much lower FSA (flexible spending account) limit of $2,700 even if out-of-pocket costs may be higher.
Because HSA rules allow funds to carryover indefinitely with the triple tax-free benefit of funds going in tax-free, growing tax-free and coming out tax-free for qualified medical expenses, I have yet to find a reason that someone wouldn’t choose to max out their HSA before funding their 401(k) or other retirement account beyond their employer’s match.
Health care costs are one of the biggest uncertainties both while working and when it comes to retirement planning.
A large medical expense for people without adequate emergency savings often leads to 401(k) loans or even worse, early withdrawals, incurring additional tax and early withdrawal penalties to add to the financial woes.
Directing that savings instead to an HSA helps ensure that not only are funds available when such expenses come up, but participants actually save on taxes rather than cause additional tax burdens.
The same consideration goes for healthcare costs in retirement. Having tax-free funds available to pay those costs rather than requiring a taxable 401(k) or IRA distribution can make a huge difference to retirees with limited funds. Should you find yourself robustly healthy in your later years with little need for healthcare-specific savings, HSA funds are also accessible for distribution for any purpose without penalty once the owner reaches age 65 – a lot of people don’t realize this little nugget. Non-qualified withdrawals are taxable, but so are withdrawals from pre-tax retirement accounts, making the HSA a fantastic alternative to saving for retirement.
To summarize, when prioritizing long-term savings while enrolled in HSA-eligible healthcare plans, I would strongly suggest that the order of dollars should go as follows:
Remember that HSA contributions can be made via payroll deduction if your plan is through your employer, and contributions can be changed at any time. You can also make contributions via lump sum through your HSA provider, although funds deposited that way do not save you the 7.65% FICA tax as they would when depositing via payroll.
The bottom line is that when deciding between HSA healthcare plans and other plans, there’s more to consider than just current healthcare costs.
An HSA can be an important part of your long-term retirement savings and have a big impact on your lifetime income tax bill. I know it’s a big part of mine, despite having relatively high healthcare costs for someone my age.
HSA Contribution Limits 2020
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.