Video: 4 Reasons Executives and Business Owners Should Consider a Health Savings Account

Video Transcript

Charles J. Lewandowski CFP® (00:00):

Welcome to the Prudent Retirement Planning channel. This channel is devoted to those of you contemplating retirement, visualizing retirement or dreading retirement. If you’re within 15 years of that day, this channel is for you. My name is Chuck Lewandowski. I’m a CERTIFIED FINANCIAL PLANNER professional and today I’ll be discussing a great retirement savings tool that’s often ignored by executives and business owners….The Health Savings Account. It’s late in the year, and for many of us, that means we are choosing among several options for health care coverage. If you are an employee reviewing your company’s healthcare offerings. Or if you’re self-employed, you may be evaluating the choices on the Healthcare.gov website. In either case, you might have the option of enrolling in a high deductible health plan, or H D H P for short, the HDHP’s usually have lower premiums than the standard insurance offerings, but for that you’re responsible for higher deductibles and copays.

Charles J. Lewandowski CFP® (01:08):

So, a high deductible plan may not be appropriate for you if you require a significant amount of health care services. Besides the lower cost, if you enroll in the high deductible plans, you are eligible to establish a health savings account or HSA. The HSA was designed to allow employees to use the premium savings from a high deductible plan to offset the higher deductible, which goes with these plans. Many think, the account is a use it or lose it benefit. It’s not. That feature belongs to the similarly named, Flex Spending Account. Unlike the Flex Spending Account, funds deposited in a Health Savings Account can be carried over from year to year. The health savings account has a fantastic side benefit. The savings accumulating in the account are tax deductible, and if used properly for health care expenses, withdrawals are tax-free. So here are the reasons you should consider an HSA.

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1. Contributions are federally tax deductible, regardless of income.

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2. Health savings account funds may be invested in mutual fund type accounts.

Charles J. Lewandowski CFP® (02:25):

3. Federal tax on earnings is deferred until withdrawal. All withdrawals, including earnings used to pay for qualified healthcare costs, are free from federal taxes, regardless of when they are made. In retirement, these qualified expenses can include Medicare premiums. State income taxes might apply, so you should consult with your tax advisor to see if they apply to you.

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4. If the HSA contributions are directly made through a payroll deduction, those withdrawals may not be subject to social security tax either.

Charles J. Lewandowski CFP®  (03:03):

So how much can you put in these accounts? In 2021, the family contribution limit is $7,200. If you’re over 50, you can add an additional thousand dollars. So if your employer’s plan is structured properly, you may be able to shelter $8,200 federal and state income taxes, as well as social security taxes. In a high income tax state, that’s a huge opportunity!

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So who should consider an HSA? Well, if you’re an employee who may not use significant healthcare coverage during the year, you would get reduced premiums and those savings can be used to reduce taxes. A self-employed individual looking to reduce self-employment taxes might want to use an HSA. The contributions not only are free from federal taxes, but they’re also not subject to social security taxes.

Charles J. Lewandowski CFP® (03:55):

Finally, if you are a person who wants to increase retirement savings and can afford to pay their health care costs out of pocket, this is a great plan for you. Money can be accumulated over a period of years. The money is tax-free going in. It may be tax-free when taken out. The health savings account may not be appropriate for everyone. As I said earlier, if you require significant amount of health care services annually, it might not be for you. However, if a high deductible plan is your only option, or if you can pay for health care out of your normal savings, it could be a great tax saving benefit in both the short and long term. If you’d like more information about the health savings account and other topics, please visit my website, CharlesJLewandowski.com. I hope to see you soon.

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