In her article, “Don’t Miss Out on This Last Minute Tax Planning Tip” Megan Gorman from Forbes.com writes:
It usually happens in your accountant’s office or when meeting with your financial planner. As you review your 2019 W-2, it becomes clear that you are missing out on a key tax benefit: maxing out your Health Spending Account or HSA.
To some degree it might not seem important or maybe you just think you’ll get to it next year. But many Americans feel they’re behind in retirement planning and every little bit helps. Don’t overlook one of the special features of an HSA. Like with an IRA, participants have until April 15th to fund it for the prior year.
And HSA providers are ready for this last-minute funding.
“Just like with IRAs, we see the biggest rush when they have had their taxes completed,” says Anna Kissick, Director of HSA Business Development at Liberty Savings Bank. “Their tax accountant has that discussion about what are additional things a consumer can do to save on taxes and they invariably talk about how much more they can contribute to maximize their tax deduction.”
This can also create a meaningful tax impact. HSA contributions are an above the line deduction on a tax return. For 2019, Americans can still fund $3,500 for individual plans and $7,000 into family plans. Further, if you are over 55, you can also do a catch-up contribution of $1,000. For many, this can translate into real tax savings.
Timing Is Everything
“We see consumers contribute to their HSA up to the tax deadline on April 15, 2020,” says Steve Auerbach, CEO of Alegeus, the HSA industry’s leading consumer healthcare funding platform. “Those who haven’t reached their maximum contribution limit for 2019 should consider doing so to reap the greatest tax benefits. To ensure their contribution is fully processed by the deadline, they shouldn’t wait until the last minute.”
For individuals who find themselves in this position, there are a couple of ways to address it. First, you need to determine if you actually have an HSA account. Often times, employers open them for you with your HSA compatible health care plan.
If you don’t have an HSA, you will need to open an account. Be aware that many HSA plan administrators are not able to have participants open and fund an account on the April 15th deadline. As a result, if you want to fund for 2019, you should plan on doing it before the final deadline.
But if it is simply a matter of not fully maxing out your HSA, contact your plan administrator to find out where you can send a check to add to the balance. Further, make sure you ask how you should code it to be seen as a 2019 contribution which will allow you to take the above-the-line deduction when you file your return this year.
The Larger Retirement Picture
Further, it is important to not shrug off the opportunity to add to an HSA, even if the amount you can to the account is small.
Auerbach points to an important statistic: “The average 65-year-old couple will need at least $285,000 to cover healthcare and medical expenses in retirement.”
That is a daunting amount to save – and that assumes you stay in good to average health in retirement. But that is where the magic of HSAs can help. Once you fund the account, you should take the next step and invest the funds. The combined power of tax deferred compound growth and investment returns can get you closer to the key amount needed for retiree medical expenses.
Further, the HSA industry is moving to provide better investment options for participants. In Morningstar’s 2019 Rankings of HSAs, most if not all HSA plans offer low cost target retirement fund options.
It is important to remember when investing in an HSA that you have a long-term horizon. If you are using your HSA for retirement planning, you want the funds to grow so that the account is ready for use when you turn 65.
Kissick points out that this also applies to the regular medical costs in retirement. “At this time, Medicare premiums are considered a qualified medical expense as are qualified long-term care premiums, with current law being what it is.”
If used for qualified medical expenses, the distributions are tax-free. While the cost of medical in retirement is high, using tax free funds lessens the burden.
Low Hanging Fruit
Ultimately making sure you maxed out your HSA for 2019 can have a significant impact on your retirement planning.
Kissick agrees. “We, as consumers, have a powerful tool at our fingertips for planning, if we keep in mind the importance of growing that portfolio by maxing out our contributions limits and considering that managing HSAs are as important as managing our 401K and IRA assets.”
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