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Education Center » Making the most of your HSA- Strategies for every age and stage

Making the most of your HSA- Strategies for every age and stage

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Whether you’ve just started contributing to your health savings account (HSA) or have had one for years, chances are it offers more savings power than you realize. From paying your health plan deductible to buying braces to getting reimbursed for prescriptions, your HSA allows you to cover eligible medical expenses using pre-tax dollars.

No matter where you are in life—or where you’re headed—here’s what you can do to make the most of your HSA.

HSAs provide potential for a triple-tax advantage1 — something even a
401(k) account or IRA can't do:

  • Account contributions are federal income tax deductible (or pre-tax if made through payroll deductions)
  • Any potential earnings are federal income tax-free
  • Withdrawals for qualified medical expenses are federal income tax-free

I'm in my 20s...
What can an HSA do for me?

HSAs are exclusively for people enrolled in a high-deductible health plan. High-deductible health plans are extremely popular with young people because the monthly premiums are typically lower. And let’s face it, as a young person you tend to be healthier and, therefore, less likely to need a lot of medical care.

By contributing to an HSA starting at an early age, you have the opportunity to let your money potentially grow tax-free for 30-40 years. A parent or loved one can also make contributions to your HSA on your behalf. In total, contributions are limited to the annual maximum set by the tax laws. For 2019, the tax law maximum is $3,500 for individuals and $7,000 for families. For 2020, it's $3,550 for individuals and $7,100 for families.

Unlike a flexible spending account (FSA), you own your HSA and it's yours for life. Any unspent funds roll over from year to year. You can use the funds now or in the future and even use them to help you pay for health care during retirement.

I'm in my 40s...
I have an HSA, but am I using it the right way?

Regular checkups are one thing. But between Bobby’s braces, Julia’s allergy medicine, and your eyeglasses, once you hit your 40s you may be paying a pretty penny to keep everyone healthy.

At this stage of life, an HSA potentially offers you a tax-advantaged way to pay for common medical expenses. Let’s assume that your effective tax rate is 25%. Paying with pre-tax HSA dollars is like getting a 25% discount on things like your prescriptions, fillings and ankle wraps—helping you stretch your money. You can pay qualified health care expenses right away using your HSA dollars, or you can pay cash, save your receipts and get reimbursed later—which gives your money more time to potentially benefit from growth.

Retirement is on the horizon...
How can I maximize my HSA?

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The first thing you can do if you’re age 55 or older by the end of the year is to take advantage of the higher HSA contribution maximum allowed by the tax laws. In 2019 and 2020, that means you can contribute an extra $1,000.

While it might seem challenging to increase your contributions, you may want to consider how you could juggle your finances to allow you to save more while you are still working. Even people who have healthy diets, exercise regularly and limit their vices don’t get a “good health guarantee”— and almost everyone becomes a bigger consumer of health care as they age. Consider this: A healthy couple may need up to $301,000 for health care expenses after they retire2. When paying for health care costs in retirement, the HSA is a smart way to go. The money you contribute may be tax-deductible (or pre-tax if contributions are made through payroll deductions) with a potential for federal income tax-free growth. It can also be used to pay for qualified health care expenses federal income tax-free. Medicare premiums3, long-term care, nursing services, prescription medications and more4 are all currently qualified to be paid from an HSA account.

Maxing out your HSA to establish a nest egg to use for qualified health care expenses could potentially free up your other savings— enabling you to do the things that are important to you.

Learn more and take action

Want to find out more about HSAs? Bank of America can help—visit healthaccounts.bankofamerica.com today. You should also check with your employer.

 
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Merrill, its affiliates, and financial advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice. If you have questions regarding your particular health care situation, please contact your health care, legal or tax advisor.

Mutual Fund investment offerings for the Bank of America, N.A. ("BANA") HSA are provided by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered broker-dealer, Member SIPC and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp"). Investments in mutual funds are held in an omnibus account at MLPF&S in the name of Bank of America, N.A. ("BANA"), for the benefit of all HSA account owners. Recommendations as to HSA investment menu options are provided to BANA by the Chief Investment Office ("CIO"), Global Wealth & Investment Management ("GWIM"), a division of Bank of America Corporation. The CIO, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for GWIM clients, is part of the Investment Solutions Group (ISG) of GWIM.

1About Potential Triple Tax Advantages: You can receive federal income tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you, your spouse or dependents incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to federal income tax and may be subject to an additional 20% federal tax. Any interest or earnings on the assets in the account are federal income tax free. Amounts contributed directly to an HSA by an employer are generally not included in taxable income. Also if you, or someone else, make after-tax contributions to your HSA the contribution may be tax deductible. Certain limits may apply to employees who are considered highly compensated or key employees if the employer makes contributions to your HSA or you make HSA contributions through payroll deductions. It is recommended that you contact qualified tax or legal counsel before establishing a HSA.

2Employee Benefit Research Institute, May 2019. A 65-year-old couple, both with median drug expenses would need $301,000 to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) in retirement. A 65-year-old man would need $144,000 or a 65-year-old woman would need $163,000 to have to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) in retirement. Savings are needed for Medigap premiums, Medicare Part B premiums, Medicare Part D premiums and out-of-pocket drug expenses for retirement at age 65 in 2019.

3Employee Benefit Research Institute, May 2019. A 65-year-old couple, both with median drug expenses would need $301,000 to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) in retirement. A 65-year-old man would need $144,000 or a 65-year-old woman would need $163,000 to have to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) in retirement. Savings are needed for Medigap premiums, Medicare Part B premiums, Medicare Part D premiums and out-of-pocket drug expenses for retirement at age 65 in 2019.

3For those over age 65, premiums for Medicare Part A or B, Medicare HMO and employee premiums for employer sponsored health insurance can be paid from an HSA.

4The Internal Revenue Service (IRS) publishes a list of qualified expenses in Publication 502, Medical and Dental Expenses, available at www.irs.gov.

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