By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Many people with Health Savings Accounts (HSAs) can use them to pay at least a portion of their long-term care (LTC) insurance premiums, but whether you should now or later requires other considerations.
HSAs allow individuals and families to save tax-free to pay for a variety of medical costs that aren’t covered by insurance. Prescriptions, deductibles and co-pays—among many other medical expenses—can be paid for using dollars withdrawn from HSA accounts.
Individuals who have high-deductible health insurance plans can save as much as $3,350/year in an HSA. For families, $6,750/year can be contributed to an HSA. People over age 55 are eligible for another $1,000 catch-up contribution. You can choose to make withdrawals against these contributions as you incur qualified health care expenses. But you can also choose not to withdraw from the HSA. You can invest money in the HSA similarly to an Individual Retirement Account (IRA). You can defer use of this money hoping to grow this resource for future use. Any growth in the account is tax free as long as it is used to pay for qualified expenses. The contribution to the HSA may also be income tax deductible.
If you are eligible, the HSA can be a more tax-efficient investment vehicle than an IRA. Done correctly, contributions are tax deductible and withdrawals are tax free. HSAs combine the benefits of a Traditional IRA and a Roth IRA.
LTC Premiums via HSA
HSA money can be used to pay for LTC premiums at different rates depending on the age of the LTC policy owner. These amounts will be inflation adjusted, so they will change over time.
- Age 40 or younger: $390 per year per person
- Age 41-50: $730 per year per person
- Age 51-60: $1,460 per year per person
- Age 61 to 70: $3,900 per year per person
- Age 70+: $4,870 per year per person
One limitation is that you can no longer contribute to an HSA after you turn age 65 and begin to participate in Medicare. You can, however, use any HSA balance you have to pay for LTC premiums until the HSA assets are used up.
Also, you don’t have to pay for your LTC insurance premiums with HSA money each year. You can do so or not as you see fit. Since many people realize much of their out-of-pocket health care costs late in life, you could choose to simply invest the HSA money without intent to use it until after years of gains. Of course, by investing this money, the account balance is subject to risks that growth of the account may not materialize as expected.
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