Matt Clarkin, president and cofounder of consultant firm Access Point HSA, notes that after a certain age, the 20% penalty for using HSA funds on nonqualified expenses goes away.
“At age 65, that HSA is a 401(k) on steroids. If I use it for a qualified medical expense, it’s tax free. If I use it for something other than that, I’m just paying ordinary tax on it.”
HSAs still turbocharge 401(k) savings for clients under age 65.
[Related: HSA Balances Growing Despite Obstacles]
“On the essentials and the lifestyle, you’ve got the 401(k) doing a great job, but it can’t do as good a job on the medical as the HSA can,” Clarkin said. Medicare Parts B and D are means-tested, he pointed out, so “if I’m only using my 401(k) to pay for my expenses in retirement, I may actually end up spending more for Medicare Part B and D because it’s means-tested based on my modified adjusted gross income. As opposed to if I’m using my HSA for that third leg of the stool, I avoid the possibility of having to pay more for Medicare in the first place, never mind the fact that I’m able to prepare for it on a tax-free basis.”
High Deductibles Set High Hurdles
As many advisors also know, to begin saving or investing in an HSA, clients must be covered by a high-deductible health plan and can’t be on Medicare. However, that can present a challenge to investors who are afraid of a high deductible.
“When they sit down and try to decide [between] a traditional plan or going with the high-deductible health plan, … they never consider what that HSA could possibly do for them. So, they missed a real big part of the calculus to make that decision in the first place,” Clarkin said. Advisors can provide a real service to their clients by helping them compare the relative savings of their health plan options, including coinsurance and copays after they meet their deductible.
“When I get past the deductible and I look at the difference in my premiums between the high-deductible plan and the PPO, there’s 100% chance that whatever your savings is on that premium, you’ll realize it,” Clarkin said. “You have to; it comes out of your pocket.”
There isn’t a 100% chance that an investor will have to pay their full deductible, he pointed out.
“One size never fits all, but there are a lot of folks who are probably on the PPO based just on being spooked by the deductible. [They’re] not thinking about the idea that you may not pay that deductible, the entire thing, and you are going to see the savings on your premium and you’ve got this HSA available to you, which is a super powerful tool in the long term help you pay your Medicare expenses and health care expenses in retirement.”
‘Don’t Leave Money on the Table’
Annual contribution limits for HSAs in 2020 increased to $3,550 for individual accounts, and $7,100 for family accounts. Catch-up contributions were unchanged at $1,000 for people 55 or older.
The 2020 contribution limit for 401(k)s was increased to $19,500, while the catchup contribution for participants 50 and older increased to $6,500.
