Health savings accounts (HSA) are becoming more and more popular among federal employees, and for good reason. Under certain circumstances, these accounts have a number of clear advantages when it comes to funding medical care in retirement.
However, an HSA isn’t necessarily a good choice for all federal employees. Let’s go over a few factors that will determine whether you can benefit from one.
Not all federal employees have the option of opening health savings accounts in 2018, so it’s important to first be aware of the various prerequisites:
- You must be enrolled in a high-deductible health plan (HDHP).
- You must not be enrolled in Medicare.
- You must not be enrolled in any other non-HDHPs.
- You must not be claimed as a dependent on another’s tax return.
If you meet these requirements, there’s a strong chance that you’re already eligible for an HRA!
But if you don’t yet meet all of these requirements, don’t assume that making the necessary adjustments to become eligible is advantageous for you. Much of this depends on your current health, age, as well as other variables; and we’ll discuss this shortly.
As is the case with most accounts, health savings accounts have contribution limits. For the year 2018, here are the new limits:
- For self coverage, the maximum allowable contribution is $3,450.
- For self plus one or self and family coverage, the maximum allowable contribution is $6,900.
- Employees who are 55 years or older can make a “catch up” contribution of up to $1,000.
Now that you know you’re eligible and understand the annual contribution limits, let’s look at some of the main benefits that health savings accounts offer:
- Contributions are tax-deductible, as long as they’re made with after-tax dollars.
- Withdrawals are tax-free, as long as they’re used for medical care.
- Earnings are tax-free, meaning that any growth the account accumulates goes untaxed.
- Contributions can come from different sources, meaning anyone who wants to contribute to your HSA (relative, employer, etc.) can do so.
One important caveat to note is that if you withdraw funds from your HSA for expenses that are not medical related, these withdrawals lose their tax-free status. At that point, you are subject to any federal and state income taxes. If you happen to withdraw funds for non-medical purposes prior to the age of 65, you can also incur a 20% penalty.
So, in order to make best use of an HSA, keep those funds set aside for medical, dental, and vision expenses only. That leads us to our next question:
Who is a good candidate for an HSA?
If you’re someone who is in very good health, a health savings account might be a great option for you, and here’s why:
As we mentioned earlier, an HDHP is a prerequisite for an HSA; and you should only have an HDHP if you don’t need to pay the high deductibles that the plan mandates. Otherwise, an HDHP is actually very risky and can prove extremely costly if you have poor health or health complications.
So, a very healthy individual paying the lower premiums of an HDHP is an ideal candidate for a health savings account. Does that sound like you? Speak to your financial advisor about health savings accounts today!