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Planning for retirement is an important part of family wealth planning.

We want to help our clients create long-term prosperity through estate planning and wealth building practices.

One of the great tax savings and retirement vehicles is the Health Savings Account (HSA). By growing an HSA year after year, tax-free, families can prepare for the biggest expense in retirement and save on their current income tax.

What is a Health Savings Account?

A Health Savings Account is a tax-exempt account you can set up to pay for current medical expenses, while saving for those in the future. Fully deductible contributions can be made up to $3,400 for singles, and $6,750 for families per year (as of 2017). The account can grow like a Roth-IRA because the interest earned is also tax-free.

HSAs are available for taxpayers who are enrolled in qualified high deductible health plans (HDHP). According to the IRS, a qualified HDHP has:

  • a higher annual deductible than typical health plans, which is over $1,300 for individuals and over $2,600 for families, as of 2017, and;
  • a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses. This limit is $6,550 for individuals and $13,100 for families, and;
  • an HDHP must not cover any additional benefits other than preventive care before the annual deductible is met.

HSAs are different from Flexible Savings Accounts (FSAs) in which you should use funds within the contribution year, and only up to $500 can be carried over to the next year.

Even though HSAs help pay for current medical expenses with tax savings, the advantage as a retirement and investment tool shouldn’t be overlooked.


  • You own your HSA account.

    Unlike other retirement plans, an HSA account is portable and does not need to be rolled over if you change employer or health insurance. You have complete control over your HSA account.

  • You save on health insurance premiums.

    High Deductible Health Plans should be coupled with HSAs, because the purpose of the HSA is to provide funds when you need to pay out-of-pocket. HDHP offers lower premiums than other health plans because you are covering your own medical expenses until the annual deductible amount is reached. If you are currently spending little on healthcare, choosing lower premiums for your HDHP and setting aside money in an HSA is a great way to prepare for future expenses.

  • You can pay for current and future medical expenses completely tax-free.

    HSAs can cover more than services provided by licensed medical practitioners. The list of qualified expenses includes acupuncture, homeopathy, substance abuse treatment, birth control pills, vision, dental care and many others. Currently, you cannot pay insurance premiums through an HSA.

  • Save on current income tax and employment tax when you contribute through payroll.

    If an individual funds an HSA with his net income, he will be able to deduct it on his personal tax return and save 10% to 39.6%, plus the state tax on contribution based on an individual tax bracket. However, if an individual contributes through payroll as an employee, he can save an additional 7.65% on payroll taxes.

  • Save on income tax with investment profits from an HSA account.

    The biggest benefit of an HSA comes when you invest these funds. This money can grow tax-free. Funds can be withdrawn anytime for qualified medical expenses without paying tax.

  • Withdrawals can be made without penalty after you reach 65 years old.

    Your withdrawals for non-qualified medical expenses incur a 20% penalty up to the age of 65 years, similar to the 10% penalty for IRA early withdrawals. However, as soon as you reach 65 years old, there is no penalty, and you just pay income tax on the withdrawal amount.
    Considering that most people make less income in retirement, and that HSA funds can grow tax-free over years, an HSA account is a great way to save for retirement.

How to set up an HSA if you are an employee.

Ask your employer if it provides an HSA as part of its health benefit program. Employers are not required to provide HSAs, but might choose to make a full or partial contribution to your HSA.

  • If your employer funds HSAs:

    Your employer might choose to fund your HSA fully or partially because it is saving costs by offering low premium HDHPs. It might have preferred HSA custodians, but you can look for one independently to find better fee structures and investment options.

    Employer contribution is tax deductible as an employee benefit. If an employee contributes any amount pre-tax through payroll, he saves 7.65% on payroll tax. The employer saves on payroll tax and unemployment tax on employee contribution, as well.

  • If your employer allows funding HSA through payroll:

    An employer that does not contribute to an HSA might decide to allow you to directly fund your HSA through payroll. Tell your employer how it can save on payroll tax when you make a pre-tax contribution.

  • If your employer doesn’t fund and doesn’t allow funding HSA through payroll:

    You can still fund your HSA with after-tax money, then deduct the annual contribution amount on your tax return. However, the tax savings is slightly less because you are only saving on income tax, but not payroll tax.

How to set up an HSA if you are self-employed.

HSA contributions made by employers are usually deductible business expenses. However, different rules apply for self-employed business owners.

When an individual runs a business as a sole proprietor without an entity, an HSA contribution is treated as if an individual is making a contribution. He cannot deduct it as a business expense, and can only deduct it on his personal income tax return.

Even if an individual organizes the business as a partnership, LLC or S-corp, and pays himself as an employee, the same rules apply. The contribution is not a deductible business expense, but can be deducted after-tax on a personal level. The owner cannot make a pre-tax contribution through payroll.

However, any contributions to an HSA made on behalf of employees (that are not owners) are deductible business expenses.

Since HSA contributions are not deductible for businesses, and there is no tax savings, a business owner is better off contributing after-tax income to his HSA account and claiming the deduction on his income tax return.

Can I have an HSA if I live abroad?

IRS Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans does not suggest that you cannot fund an HSA account while living abroad. As long as you are enrolled in a qualified HDHP, and no other health insurance in a foreign country, you should be able to take advantage of an HSA.

While you can use a debit card to make a medical related purchase or reimburse yourself by writing a check, you should be aware there are particular rules about “medicines and drugs from other countries.” When you purchase and consume a prescribed drug in another country, the drug should be legal in both that country and the United States as a qualified medical expense.

Estate Planning for HSAs.

When an HSA account holder dies without having an estate plan, the remaining balance in the HSA account will pass on to his family members through a court process called probate. A probate often takes a few months to complete, and fees for this can be 5% to 10% of the estate.

To avoid probate, you can easily designate a beneficiary when you set up the HSA. Here is what happens when you designate your spouse, revocable living trust or individual beneficiary.

  • Your spouse is the beneficiary.

    If you are married, the best option for beneficiary is probably your spouse. When the spouse is the primary beneficiary, he or she can treat your HSA as her own HSA and continue to use it for qualified medical expenses, without having to pay income tax on the value of the inherited HSA.

  • Your Revocable Living Trust is the beneficiary.

    Unlike other financial accounts in which you can transfer ownership to the trust, an HSA cannot be owned by the trust. However, you can achieve the same result by designating your Revocable Living Trust as a beneficiary.

    When the revocable living trust is a beneficiary, the balance in the HSA account will be funded into a trust or trusts upon death, and will be taxable income on your final income tax return. The funds can then be used for the benefit of beneficiaries under the terms of the trust.

  • An individual other than your spouse is the beneficiary.

    If you are single or have children from a previous marriage, you might choose to have someone other than your spouse as the primary beneficiary.

    The main drawback in this case is that the account stops being an HSA, and the fair market value of the HSA is taxable to the beneficiary. However, the taxable income can be reduced by the amount of qualified medical expenses the beneficiary paid for the deceased within a year of the death.

    If your beneficiary is a minor, it is important to name a revocable living trust as a beneficiary instead of the minor. Otherwise, the account will be subject to control by a court-supervised guardian.

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