Today, with more than $1 out of every $6 spent on health care, it is clear to many savers that rising health-care costs are an important consideration when planning for the future. As a result, many investors in high-deductible health plans are putting money away for future expenses in health savings accounts (HSAs), which are experiencing significant asset growth.
HSAs are typically offered to individuals enrolled in health insurance plans with a high deductible. Most HSAs are available through an employer. But under the current Affordable Care Act, individuals may purchase an HSA through a state exchange. There is no time limit for distribution of the funds and these accounts are portable. An HSA may be an option for covering health-care costs in retirement.
HSAs also offer a “triple tax benefit” for savers. Contributions are made with pre tax dollars, assets grow without incurring a tax on the interest, and money withdrawn is tax free as long as it is used for qualified medical expenses.
Recently the Internal Revenue Service announced higher contribution limits for HSAs in 2018. The annual limit for individuals rose by $50 to $3,450. For family coverage, the limit increased by $150 to $6,750.
Rising health costs
Health-care costs have outpaced earnings and inflation over the past 15 years and are expected to continue to climb. The number of savers using HSAs for future health expenses is rising, but 46% of workers with an HSA in a recent survey said they are using the account primarily for immediate- or near-term costs.
Younger workers may be using HSAs as a way to save for the future. Millennials are investing 20% more of their salaries in HSAs compared with other age groups. With less demand for health-care expenses at younger ages, it may be easier to set aside funds for the future with an HSA.
Potential for expansion
Lawmakers want to expand the use of HSAs. In the American Health Care Act — recently passed by the House — there are several proposals to expand the use of HSAs. Among the provisions: Contribution limits were increased, qualified expenses were expanded to include over-the-counter medications, and the tax penalty for withdrawing funds for a non-qualified expense was lowered to 10% from 20%. This legislation, however, moved to the Senate, which is currently writing its own proposal.
While HSAs are already gaining traction, their growth may jump if supportive policies are approved in the health-care reform process. Individuals with access to an HSA may consider getting some expert advice on how these accounts could fit in with a long-term financial plan. Women in particular, who statistically live longer and may require more funds for health-care in retirement, may want to learn more about HSAs. Savers must also be mindful of how they use the funds in order to avoid the penalty tax.
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