Most physicians have a pleasant problem: They make too much money per year to make fully-deductible contributions to a traditional IRA for retirement. Many earn too much to contribute to Roth IRAs as well.
But there’s another less well-known option for physicians in private practice, or who have access to a high-deductible health plan (HDHP) from their employer: Max out the health savings account, or HSA.
These accounts were originally designed to make it easier for Americans to limit health insurance costs by adopting plans with higher deductibles. By taking on more of the risk, Americans could also pay much less in insurance premiums. Congress came up with the HSA to make it easier for Americans to save money to handle the higher deductibles, as well as make Medicare and long-term care insurance premiums more affordable.
And the good news is there are no income limits on your eligibility to contribute to a health savings account.
Here's health savings accounts work:
- Only those covered by a high-deductible health plan are eligible to contribute to an HSA.
- Contributions to an HSA are pre-tax. Employers may contribute on employees’ behalf.
- Unused amounts roll over from year to year and continue to accumulate. This is a key difference from flexible spending accounts (FSAs), in which unused amounts are usually forfeited back to the employer.
- Assets within the HSA grow tax deferred, like an IRA.
- Withdrawals to pay qualified health care expenses are tax-free.
- A 20 percent penalty applies on withdrawals not used to pay medical expenses.
- This 20 percent penalty goes away once you reach age 65. At that age and later, you can access the funds in the HSA for any reason, without penalty. You only pay income tax on any amounts you take out that are not used to pay or reimburse yourself for health care expenses.
The result is equivalent to a traditional IRA that is juiced up to provide an extra benefit as long as you use withdrawals to pay qualified medical expenses. These expenses can even include Medicare and long-term care premiums, both before and after your 65th birthday, prescription drug costs, dental, vision and hearing care (even if they are not covered by your health insurance plan), durable medical equipment and much more.
For a full list of qualified health care expenses that you can pay for, tax free, using your HSA, see IRS Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans.
In addition to the lack of income limitations on eligibility contribute, the HSA has other advantages as well, compared to other retirement accounts. Specifically, there are no required minimum distributions. If you don’t need the income to live on, you can let it accumulate tax-deferred, indefinitely. Once you pass on, you can pass the assets on to your heirs, like any other retirement plan.
Advanced HSA Planning Tips
Some advisors have noticed that you don’t have to make withdrawals from an HSA in the same year in which you incurred the medical expense. You can wait as long as you like – even decades – before you make a withdrawal from your HSA to reimburse yourself for medical expenses.
Meanwhile, you can pay for health expenses out of pocket, and let the entire amount in your HSA continue to compound tax-deferred for as long as possible. Just keep the receipts, and be able to prove you incurred these health care expenses in future years.
As long as you can prove you paid these expenses out of pocket, any amounts withdrawn from your HSA up to that amount will be tax-free.
So it behooves you to keep careful records of all health care expenses for yourself and your family covered under a high deductible health plan.
Meanwhile, as long as you are covered by a qualified HDHP, you can contribute up to $3,850 for a self-only plan as of 2023, and up to $7,300 for a family plan.
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