New York Estate Planning & Elder Law Blog
GOOD FOR CERTAIN SUBSET OF POPULATION
A health savings account is another way to save your money, tax free, for an inevitable expense that everyone will have to face and deal with eventually. Unfortunately one of the variables of retirement is that you will never know how much you will spend on health care costs. At the same time, as the body ages health invariably declines with more visits to the family doctor or perhaps even more expensive specialists. To further add to the expense, modern medicine has added significantly to the life expectancy of the majority of people who do not meet some unfortunate trauma or accident.
This is often the result of more expensive treatments, more costly medicines and more diagnostic tests or procedures that occur more often. Often these treatments, medicines, tests and procedures are medically appropriate, so any money spent is money well spent. But as with anything in life, the question must be asked, from where did the money come from? Insurance does not cover all medicines, tests and procedures and even when it does, it does not one hundred percent of their costs. You can pay for better insurance plans, with the inevitable higher monthly premiums, which leads back to the original question of where does the money come from for these costs? A more sound approach to these unknown variable but inevitable costs is a health savings account. Health savings accounts are not for everyone, but for a sizable portion of the population they are a good fit.
HIGH DEDUCTIBLE HEALTH INSURANCE PLAN
The most important thing to know about a health savings plan is that a necessary prequisite is that the beneficiary must be enrolled in a high deductible health insurance plan or they are entitled to Medicare part A benefits (inpatient or hospital benefits). A high deductible health plan is any plan wherein the deductible is at least $1,250 per person or $2,500 per family.
A person is automatically eligible for Medicare part A once they have certain defined medical diagnoses or they are 65 and worked at least 10 years. While it is not a legally necessary prerequisite, it may be a good idea to invest in a health savings account if you maxed out on your 401(k) and/or your IRA, if otherwise eligible. You can invest up to $3,250 per year tax free or $6,450 per family. If you are 55 or older you can invest an additional $1,000 per year tax free. The money grows interest tax free and as long as it is used for qualified medical expenses, there is no tax penalty.
Not only does the money grow tax free and the money invested into the plan is also nontaxable income, but the investor also avoids the over seven and one half percent Medicare and Social Security payroll tax. Some companies even allow you to invest your money in mutual funds instead of keeping your money in liquid cash form. You can use the money at any age for any proper medical expense. After the age of 65 you can withdrawal the money from the account for non-medical expenses and it is taxed as if it were a distribution from your individual retirement account. It is important to note that there is a great diversity of plan treatments, some treated as a general savings account with all of the normal protections afforded under FDIC, while others are treated as an investment vehicle. It is always best with any financial product to see what the schedule of fees are before investing.