In 2003 under President George W. Bush, the Medicare Modernization Act was passed allowing for prescription drug coverage under Medicare. Along with this additional coverage under Medicare was the new allowance for Health Savings Accounts (HSAs) to be coupled with qualifying high deductible health insurance plans. This new type of bank account would provide added incentive for those who subscribed to more affordable, catastrophic type health plans.
HSAs offer three very attractive tax advantages.
- Contributions are 100% tax deductible
- Interest earned on growth is tax deferred similar to an IRA or 401k
- Withdrawals are tax free just as long as funds are used on qualified medical expenses including dental and vision, as well as doctor prescribed medications.
These tax advantages define HSAs as the only investment in America where the contributions are tax deductible and the withdrawals are tax free. The only stipulation is the insured must be currently subscribing to a qualifying high deductible health plan (HDHP) and not on Medicare.
Insurance Exchange Navigators and its advisors have the greater majority of clients and employer groups currently utilizing HSAs and taking full advantage of the tax benefits. The belief that HSAs are a great solution for paying today’s medical expenses is a successful strategy; however, the greater long term focus needs to be contributing to one’s HSA as a retirement healthcare account. Once an individual goes onto Medicare, all HSA contributions must stop; therefore, what balance has been accrued during a person’s working years are all they may have to pay for expenses which Medicare does not during retirement. With healthcare being one of the largest expenses in retirement, HSAs become a vital part to a long term financial plan.