The requirements to establish a Health Savings Account are:
• You are covered under a high deductible health plan (HDHP) which must meet certain qualifications;
• You have no other health coverage (with some exceptions);
• You aren’t enrolled in Medicare;
• You can’t be claimed as a dependent on someone else's 2018 tax return.
No permission or authorization from the IRS is necessary to establish an HSA; you establish an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.
Usually, employers offer HDHP’s, but you may establish one with a health provider if you are self-employed or even if you are not. There are no maximum income limits for an HSA, and you don’t have to have earned income to be able to deduct contributions: $3,400 ($4,400 if you are 55 or older) for a single plan and $6,750 for a family plan.
The benefits of HSA’s are straightforward:
• Contributions are tax-deductible even if you don’t itemize your deductions;
• Monies in the account enjoy tax-deferred growth, and unused dollars in a given year can remain in the account and continue to enjoy tax-deferred growth;
• Distributions from these accounts are tax-free, provided they are used for qualified medical expenses (those that would otherwise qualify as itemized medical expenses).
One of the most important retirement planning considerations is providing the means to pay for medical expenses, since healthcare expenses can rapidly deplete one’s retirement savings. If you fund an HSA every year you are able and you don’t use the funds for current medical expenses, you can accumulate a significant amount that can help defray future medical costs. When you are enrolled in Medicare, you can no longer make HSA contributions, but you are not required to liquidate your HSA. You may continue to take tax-and penalty-free distributions for qualified medical expenses, including long-term care premiums. You can even take tax-and penalty-free distributions for Medicare premiums (but not for Medicare Supplement Insurance premiums) and out-of-pocket expenses, or for your share of premiums for employer-based coverage.
If you do not use the funds in your HSA for medical expenses, when you reach age 65, you may use them for any other purpose without penalty. If those funds are withdrawn for non-medical reasons before age 65, there is a 10 percent penalty attached to the withdrawal.
Suppose you never withdrew funds from your HSA but chose instead to pay for your covered healthcare expenses using non-HSA (taxable) assets. The good news about this strategy is that it offers a little-known benefit down the road. If you need additional funds later for something, even non-healthcare related items like a new roof or a car repair, you may be eligible to withdraw that amount from your HSA without triggering income taxes.
It's crucial that you'd have saved receipts to document the previous healthcare expenses. One benefit of this strategy is that the healthcare expenses don't even have to have occurred in the same year in which you take the withdrawal for non-healthcare-related expenses.
Correction In last week’s column, if 2019 is the first year you must take an RMD, you must do so by April 1 of 2020. Also, $500,000/27.4=$18,248, not $13,700.