HSAs: A Triple-Tax Advantage

Kevin T. Smith, CFP®, CTFA, CDFA

Each year, employees are spending more and more from their paychecks on health insurance premiums. With these cost increases, we have seen many employers offer a High-Deductible Health Plan (HDHP) as a health insurance option for employees. This has grown the popularity of Health Savings Accounts (HSAs). However, an HSA can offer much more than just an interest-bearing account to help cover out-of-pocket medical costs. It should be considered as a very good long-term vehicle to cover future medical expenses.

The Rundown
First of all, an HSA is only offered in conjunction with an HDHP. Typically, you are eligible to enroll in one if you have opted for an HDHP as your plan-type during open enrollment for health insurance with your employer.

Automatic payroll deductions present an excellent way of forced savings into these accounts and offer a triple-tax advantage:

  1. Tax deduction
  2. Tax-deferred growth
  3. Tax-free withdrawal if used for medical expenses

For 2018, a person enrolled in individual coverage may contribute up to $3,450 whereas a person with family coverage may contribute up to $6,900. Additionally, if you are older than age 55, you may make an additional $1,000 catch-up contribution per spouse.

Some Additional Benefits

  • Participants in an HSA are typically provided with a card linked to the account which allows you to pay for qualified medical expenses with ease
  • HSAs may serve as a good option for higher income earners that max out their qualified retirement plans through work and are still looking for a tax deduction
  • Funds not used in the account remain there and are continuously rolled over each year until they are used (unlike Flexible Spending Accounts)
  • Check with your plan’s trustee, but investment options may include stocks, bonds, and mutual funds as opposed to simply an interest-bearing account

The Forest Through The Trees
Too often we are short-term thinkers, but the long-term advantages of HSAs should not be overlooked. Consider the fact that many of us will live roughly a third of our lives in retirement so it is important to consider potential healthcare costs during those golden years. For example, estimates of average medical expenses for a healthy 65-year-old couple range from $225,000 to $275,000.

If an individual or family is able to contribute significantly each year into their plan and build up a considerable savings in their account, this can be a great option to help cover some of the following costs both tax- and penalty-free:

  • Long-Term Care Insurance Premiums: probably one of the most overlooked advantages (policy needs to be qualified per IRS standards)
  • Medicare Parts B, C (Medicare Advantage Plans), and Part D (Prescription Drug Coverage)
  • Orthodontics: any parent who has paid for a child’s braces knows that they are not cheap and not covered by traditional dental coverage
  • Some over-the-counter medical items such as insulin, reading glasses, contact lenses, and wheelchairs (items that the IRS considers qualified medical expenses)

Be Mindful
Any withdrawals from an HSA that are not used specifically for qualified medical expenses may be hit with a 20% penalty and subject to income tax. Once you turn 65 and begin receiving Medicare, you are no longer eligible to contribute to an HSA; however, there are no required minimum distributions and funds will remain in the plan until spent down.

Additionally, it is good to check with the trustee of your HSA to review your investment options. Remember, with our life expectancies lengthening, our medical expenses will follow suit. HSAs can provide an excellent way to alleviate some of these future medical costs in a tax-efficient manner. As always, I recommend including your accountant or tax preparer in the decision.

In summary, an HSA should be on your radar as much as your 401(k) and other employer-sponsored plans because it can be a terrific savings account to cover both current and future medical expenses.

For more information and “light reading” on HSAs, the IRS offers Publication 969.

Please see Fenimore disclosure.


Volatility Can Provide Opportunity: Understanding Price vs. Value

“Having a strong foundation gives us the confidence to stick to our time-tested process during volatile times. When the stock market dips and investors may sell out of fear, Fenimore’s team gets excited about the possibility of buying stock in quality businesses at bargain prices. I realize we state this fact often, so, with volatility in the headlines again, it is a good time to look more closely at the heart of the matter. As value investors, the key as to why market drops can provide opportunity is understanding price versus value.” Read More.

Please see Fenimore disclosure.


Quest for Quality

The stock market peaked in January and is going through a correction as we write this in early February. We have had a long period of stock prices increasing — this correction is a natural part of the process. To reiterate, the fundamentals of the economy and Corporate America are still very strong. In fact, this type of environment can provide opportunities to invest in quality companies, both existing and prospective holdings, that have declined in price. Read More


Please see Fenimore disclosure.


Managing Risk In Today’s World

We cannot stress the subject of mitigating risk enough, especially in our rapidly changing world. Managing risk is crucial to an effective long-term plan for preserving and creating wealth. Many may seem adept at managing money during upturns, but fail to have a sound strategy for enduring and taking advantage of downturns. Our research efforts enable us to know the quality businesses behind the stocks we hold very well and this gives us the confidence to maintain, and even increase, our shares in these stable companies when the market drops. Read the Letter from Cobleskill.

Please see Fenimore disclosure.


Investing in Dividend-Paying Companies in the Midcap Space

“Paul Hogan talks about his firm’s equity-income 
fund. Mr. Hogan says the objective of the fund is

that at least 80% of the companies have to pay a
dividend. Additionally, the fund is in the midcap
space. Mr. Hogan says midcap businesses tend to
grow faster than large-cap companies. He says
right now is a great time to own an equity-income
fund because it can limit some of the downside risk
while still offering equity exposure and the
opportunity to participate in the upside as the
market moves higher.”  Read The Wall Street Transcript article.


Please see Fenimore disclosure.

How are Golf and Investing Similar?

“Scoring comes from being able to preserve what you’ve got and play your smart shots when you need to play them and not do stupid things, and take advantage of things when you have them.”    — Jack Nicklaus
Read the spring 2017 Letter from Cobleskill.


Please see Fenimore disclosure.


Letter from Cobleskill – Autumn 2016

letter-from-coby-250By Tom Putnam, Founder & Chairman

Learn what Tom Putnam has to say about the current environment in response to investors who may be tempted to try to time the market:
Although we are opportunistic when mainstream investors are fearful and there is a downturn, I think it is helpful to reiterate to you our mantra of “stay the course.” We have heard concerns about matters such as the presidential election and possible rising interest rates, and some have asked if it is a good time to be invested. I would like to reinforce a study we highlighted recently on what panicky investors have cost themselves. Read more.


Please see Fenimore disclosure.