HSAs should be part of individual’s financial planning

Health savings accounts (HSAs) are becoming more common, whether they are provided by your employer or one you hold through your own private high-deductible health plan (HDHP).  Because HSAs have tax benefits much like retirement accounts, let’s look at the benefits of the HSA and how sometimes funding these can take priority.

In order for a plan to be considered a HDHP, the annual deductible for 2016 can be no more than $6,550 for an individual and no more than $13,100 for the family. With the HDHP, you can fund your HSA up to $3,350 for individual coverage or up to $6,750 with family coverage.  If you’re over 55, you also can make a $1,000 catch-up contribution. 

Providing a triple tax break, HSAs allow contributions to be tax deductible, allows future earnings to grow tax-free, and distributions are tax-free if used to pay for any qualified medical expenses such as your deductible, co-payments, prescriptions, dental and vision. You can even pay for your long-term care insurance premiums with an HSA. 

Typically, an employer-offered retirement plan is a 401(k) or Roth 401(k) retirement account, which allows a maximum contribution of $18,000 in 2016 ($24,000 if age 50 or over). The maximum contribution to an IRA or Roth IRA in 2016 is $5,500 ($6,500 if age 50 or over). In many cases, your employer will offer you a matching contribution on your 401(k) contribution, as well. There’s nothing like a 100 percent return on your investment right away.

The tax benefits on an IRA/401(k) allow for contributions to be deductible and tax-deferred growth until those funds are distributed. Roth IRAs and Roth 401(k)s do not allow you to deduct your contributions; however, they offer tax-free growth and distributions.

Because HSAs offer a triple tax break — again including tax-deductible contributions, tax-free growth, and tax-free distributions on qualified medical expenses — HSAs might offer a greater after-tax future value than your basic retirement account. The higher a person’s combined tax rate, the larger an employer’s 401(k) match must be in order to beat contributing to an HSA first.

There are many variables -- such as your tax rate, investment returns and your employer’s retirement contribution matching rate -- to consider when   deciding whether to fully fund your HSA before your retirement accounts.