An HSA and Apple a Day Can Keep the Taxman Away

A conversation with Cannon Executive Chairman Phil Buchanan: Part 6 of 9

“You can deduct your annual contribution, withdraw funds at any age to pay medical expenses allowed by the IRS, and you will not be required to pay taxes on the amount you withdraw. This is what makes the Health Savings Account or HSA unique among Federal programs designed to encourage saving,” said Phil Buchanan, Executive Chairman of Cannon Financial Institute.

“If you have a client who is eligible for an HSA but chooses not to open one and make the maximum annual contribution, then your client is making a gift to the US Government.” 

“I’m not suggesting such an action is bad,” Phil said, noting Americans regularly make gifts to the US Government. “In 2016, American citizens donated $2.7 million dollars to the Federal Government which must use these monetary gifts to pay down the national debt. If you want to give money to the Federal government, follow the link below. It will take you to the page on the website of the US Treasury which explains how to give money to the government to pay down the debt,” Phil said. “Unfortunately, your contribution is not tax deductible.” https://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm *

If your clients are not keen on donating money to the Feds, then discover which ones are eligible for HSAs and determine if they have opened such accounts. There are specific rules which determine eligibility.  Said Phil, “the most important rule is this: your client must be covered by a high deductible health care plan or HDHP.”

For calendar year 2017, Phil said, the IRS recently issued the following guidance: “a high deductible health plan is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage.” **

If your clients can afford to pay the out-of-pocket medical expenses not covered by their health plan, they can allow the funds in their HSAs to remain undistributed without forfeiting them at the end of the year as can happen in a Flexible Spending Accounts (FSA). By leaving the funds untouched, compounding takes effect. Depending on one’s age, you can accumulate a significant sum of money.       

“A person contributing for 40 years to an HSA could save up to $360,000 if the rate of return was 2.5 percent, $600,000 if the rate of return was 5 percent, and nearly $1.1 million if the rate of return was 7.5 percent, and if there were no withdrawals,” according to the Employee Benefit Research Institute. ***

Health Savings Accounts must be opened with an approved custodian who holds the funds. (They typically send debit cards to clients as the way to access the funds). Many custodians offer brand name mutual funds which would allow you to advise your clients which funds to purchase based on their overall asset allocation plan.

Said Phil Buchanan, “these accounts offer an ideal vehicle for gifting money to adult children and adult grandchildren and anyone else for that matter. You can’t fund the account directly on behalf of someone else but you can give them the money with the understanding they will put it into an HSA. However, I always caution FAs that rules governing eligibility are complex so carefully follow the IRS regulations specified in Publication 969 which you can find at this link: https://www.irs.gov/publications/p969/ar02.html#en_US_2016_publink1000204143

Phil closed with the following. “No one can predict the future of health care and health insurance in the US. But one thing seems certain: due to advances in medicine alone, health care costs will continue to rise. Having a stash of pre-tax

dollars to help pay medical bills is a wise course of action for anyone.”

To learn more about this topic, register for our Certified Wealth Strategist program of study.

Copyright ©2017 Cannon Financial Institute - All Rights Reserved

Subscribe to Cannon Insights at http://www.cannonfinancial.com/newsletter/subscribe

Contributing Writer: Subject Matter Expert Charles McCain

Sources/Resources
* https://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm
** https://www.irs.gov/irb/2016-20_IRB/ar09.html?_ga=1.6182131.1352567504.1472233325
*** https://www.ebri.org/pdf/notespdf/EBRI_Notes_07_July-14_HSAs.pdf