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.


Mutual Fund Observer Features FAM Value Fund

Regarding the FAM Value Fund the article states, “It deserves to be better known, most especially by equity investors looking for a committed team, a value-sensitive strategy and a long, consistent record.” READ NOW

Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Please consider a fund’s investment objectives, risks, charges and expenses carefully before investing.

Fund selection was determined by the subjective criteria of the author. No objective criteria for selection (e.g.; performance returns, manager tenure, expense ratio, etc.) were evaluated for identification of these funds. Consequently, other mutual funds not identified in the article or considered by the author may have similar characteristics.

The views herein are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any security or other financial instrument. This summary is not advice, a recommendation or an offer to enter into any transaction with Fenimore or any of their affiliated funds.

All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions and does not reflect actual investment results and is not a guarantee of future results. Actual results will vary with each use and over time, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice.

These materials are not intended to be complete or to constitute all of the information necessary to evaluate adequately the consequences of investing in any securities or other financial instruments described herein. Investors should ensure that they obtain all available relevant information before making any investment. Any investment entails a risk of loss. An investor could lose all or substantially all of his or her investment. Past performance is not an indicator of future results.

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


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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.


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Dividend Growth For The Long Term

dividend-growth-wp-250Paul C. Hogan, CFA
Investment Research Analyst

Today’s environment has many investors looking for income. Some consider adding dividend-paying stocks to their portfolio and often choose dividend payers with high dividend yields; however, dividend growth is a key metric to examine as well. The statistics are compelling: companies that grow their dividend have been less risky, outpaced inflation, and performed better.

Learn more — read the concise paper.

Please see Fenimore disclosure.




IRA Beneficiaries – Your Annual Review

By Peter Sweetser, Retirement Plans Specialist

We recommend that you review, and update as necessary, both your primary and contingent FAM IRA beneficiaries annually. As the IRA distribution process occurs upon your death, if the primary beneficiary is alive, your account will go to them. If your primary beneficiary predeceases you, the IRA is distributed to the contingent beneficiary. If you have not assigned a contingent beneficiary, then it goes to your estate. If your situation has changed, there may be unintended consequences from your beneficiary designations.

For example, your IRA could be paid to your ex-spouse or current spouse instead of your children. Also, a later born child may not be named as a beneficiary. It is important to note that there can be negative tax consequences if your IRA goes to your estate instead of your spouse or other beneficiaries. Please remember how vital it is to update your beneficiaries.

Please see Fenimore disclosure.