With the threat of Obamacare being repealed in the new Trump administration, health savings accounts (HSA’s) are about to become more widely used and with that comes a great strategy very few individuals employ. This HSA strategy is a form of “asset location.” No, that wasn’t a typo. While most advisors focus on asset “allocation,” asset “location” focuses on the various accounts and how they are taxed.
First, what is a Health Savings Account or HSA? An HSA is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). These types of plans are becoming more common in workplaces as premiums continue to skyrocket.
An HSA is a tax and retirement super account. They are tax advantaged in 3 ways:
1. The employee contribution to the HSA is tax deductible.
2. Earnings on HSA funds are tax deferred. (Funds can be invested)
3. Withdrawals for qualified medical expenses are tax-free.
Graphic Source: http://blogs.reuters.com/shaneferro/2013/07/18/hsas-when-your-health-insurance-becomes-a-retirement-account/
The beauty of an HSA is that when you are 65 years or older, you avoid the penalty (20%) on withdrawals not used for qualified medical expenses. This is where the strategy comes in. To shift money out of your Retirement tax bomb or Traditional IRA, you can shift assets to a more favorable tax account in your HSA.
This strategy works for those that are 59 ½ years old to age 65 (medicare age):
1. Once you are 59 ½, you can withdraw funds from your IRA without a tax penalty. First, take a withdrawal up to the HSA contribution limit ($4,400 for individuals and $7,750 for a family which includes $1,000 for an age 55 or older catch-up). Do not withhold taxes.
2. Next Fund your HSA account. The tax deduction will off-set your IRA withdrawal.
Why is this strategy so powerful? In theory, you can transfer over $40,000 for a family from an IRA that is subject to required minimum distributions (RMD’s) and is taxable for every withdrawal, to an HSA that has no RMD requirements and withdrawals for medical expenses are tax free.
HSA’s have many complicated rules such as not being able to contribute funds once you are on Medicare so please speak to your tax advisor or financial planner about this strategy before implementation.
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Steve joined Planning Solutions Group in 2015 and specializes in providing comprehensive financial plans to high-net worth individuals and families. During his career he has realized that his true passion is for building long-term relationships with clients and helping them through the various financial challenges they may face. Steve’s mission is to act as a true advocate for his client’s financial well-being. Prior to joining Planning Solutions Group, Steve spent four years as a CERTIFIED FINANCIAL PLANNER™ with Keeney Financial Group in Columbia, MD. He has also had the privilege of working for Convergent Wealth Advisors, Legg Mason and NVR, Inc. Steve currently holds the prestigious CFP® designation and has his FINRA series 7 and life and health insurance licenses. In addition to providing clarity and confidence in all financial matters to his clients, Steve is passionate about giving back to the community. He currently lives in Baltimore City with his new wife and spends his free time rock climbing, travelling, cooking and volunteering with The Associated, a Jewish Philanthropic organization. To email Steve:firstname.lastname@example.org