While adoption rates are increasing for health savings accounts, Dennis Triplett, CEO of UMB Healthcare Services, says few realize the full financial potential of these tax-advantaged accounts:
There are three primary ways HSA account holders save on taxes: tax-deductible deposits, tax-free earnings and tax-free withdrawals. Unlike other tax-advantaged spending accounts, HSAs also have the ability to accrue funds from year-to-year, and many have investment options, similar to other retirement savings vehicles.
"We continue to see strong adoption rates for HSAs, but there is room for education on the financial benefits of these accounts," said Triplett. "Despite the tax advantages, many are not meeting the yearly contribution max or realizing the true potential of year-over-year growth in these accounts. For example, looking at account balances from May 2011 through May 2012, we saw that our account holders had an average account balance of $1,917 (up from $1,710 last May), but far below the yearly contribution maximum."
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According to the Internal Revenue Service, the 2013 contribution limits will be $3,250 for an individual and $6,450 for a family – a slight increase from 2012 limits. Those ages 55 or older have the option for an additional $1,000 catch-up contribution.
"Health care costs are a major consideration for those planning for retirement, so it is important to consider HSAs for more than your current year expenses," said Triplett. "We encourage account holders to consider the long-term financial benefits of these accounts that ultimately help individuals financially prepare to manage health care costs later in life."
To make the most of an HSA, individuals should see if they are contributing as much as they can within annual IRS limits, consistent with their personal or family budget. Today, many HSAs offer investment options, ranging from money market accounts, to mutual funds, to individual equities. These options are currently underutilized for many account holders but are worth consideration for those taking an active approach to managing and potentially growing the assets in their HSA.
"Ultimately HSAs should not be treated as pseudo checking accounts for medical expenses, as they are truly unique and powerful savings tools," said Triplett. "Now is the time to take advantage of all these accounts offer to fully realize the long-term benefits and plan for future health care costs."
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