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Medical IRAs (Health Savings Accounts) Thumbnail

Medical IRAs (Health Savings Accounts)

I promised we would talk about Medical IRAs today. This is just a different way to describe a Health Savings Account, which is probably the most powerful financial resource within the tax code. And I am totally okay with calling it the Medical IRA if it gets people’s attention. Call it marketing, but isn’t a flower just a weed with better marketing😉 Enough of that. Let me share some thoughts on this. It will be a little longer of a read at 3 minutes.

 

Background on What is a Medical IRA/Health Savings Account

  • Simply, this is a way to sock money away for medical-related expenses in retirement.
  • HSAs are triple tax free – No taxes on contributions. None on growth. Nothing on distributions that qualify (used for medical expenses).
  • You have to be in a High Deductible Health Plan to participate.
  • Contribution limits for 2025 are $4,300 for Individuals, $8,550 for Family, and then a $1,000 Catch-up if you are 55 years old.

 

Common Mistakes to Avoid with HSAs/Medical IRAs

  • HSAs have a minimum Cash requirement for the accounts.
  • The first mistake I see is clients forget to actually invest the balance of their HSAs above the Cash requirement.
  • Another mistake is using money in the HSAs to pay for medical expenses even though you have enough sitting in checking or savings accounts to pay the current bills.
  • The above goes back to the philosophy of letting the money within the HSA stay in the account and growing tax-free for use down the road in retirement.
  • The final mistake I see is people being too conservative with how they invest their HSA accounts. Again, no taxes here so let’s enjoy some higher potential growth opportunities without worry of being hit with a bigger tax bill.
  • With the point above, you still want to be cognizant of when you will need to access your HSA. However, if you are not planning on touching it for 10 years, does it make sense for it all to be in Cash?

 

Future Medical Expenses

  • In 2020, the average person who was at least 65 years old spent $2,960 a year in out-of-pocket healthcare expenses.
  • You need $116,000 in after-tax savings to pay annual out-of-pocket expenses (including Medicare) from age 65 through 95. So, $232,000 for a couple.
  • I mention the $232k number because I feel there is a line to walk as far as not having too much in your HSA. Basically, unused balances can become taxable for non-spousal beneficiaries.

 

Eligible Expenses

  • If you are thinking you won’t have enough expenses to justify waiting until retirement to tap into your Medical IRA, let me share a few expenses that qualify.
  • Qualified Medical Expenses = any expenses that qualify for medical expense deduction on Schedule A. In English, this includes:
    1. Deductibles/Out of Pocket Costs
    2. Hospital
    3. Therapy
    4. Medications
    5. Equipment
    6. Travel Expenses
  • Insurance Premiums do not qualify, EXCEPT:
    1. Qualified Long-Term Care Premiums
    2. COBRA costs
    3. Coverage while eligible for unemployment
    4. Medicare if 65 or older:
      • Cannot be used for Medigap (Supplemental Medicare)
  • Last comment on eligible expenses – You can go retro for past expenses. Note a few rules:
    1. For previous qualified expenses you had not otherwise submitted for HSA reimbursement or deducted on your taxes.
    2. HSA owner has to still be alive.
    3. The eligible expenses must have been incurred AFTER you opened the HSA.
    4. Be sure to have documentation on the expenses.

 

Impress Your Friends/Coworkers/Watercooler Conversations

  • A couple of quick bits of information you can use to impress others about Medical IRAs.
  • First, if you are planning to retire and enroll in Medicare your eligibility to contribute to your HSA/Medical IRA ends six months prior.  
  • Alright, you may have known the fact above. Hopefully this next one is new to you.
  • Specifically, you have a non-dependent child who is staying on your health insurance to age 26. They may be able to contribute to their own HSA up to the Family limit in ADDITION to what the parents are contributing as a combined limit to their own HSA.  
  • Pay attention to the Non-Dependent qualifier. Also, definitely talk to your CFP® about this to confirm eligibility.

 

This seems like a good place to stop. Again, hopefully you learned at least one thing you did not know about Health Savings Accounts/Medical IRAs. My experience has shown HSAs are important to my physician clients on everything from trying not to Tip Uncle Sam (save on taxes) to keeping more in your accounts due to starting to earn real money later than most people due to all the extra time in “school.” This is code for having a smaller window to save for retirement which also means being more aware of potential financial landmines.

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