Articles for Financial Advisors

HSA Accounts: Shadow IRAs


HSA Accounts: Shadow IRAs

The purpose of an HSA account is to have access to pre-tax dollars to pay for medical expenses or policy premiums for long-term care. Your clients can fund a health savings account (HSA) if they have a high deductible insurance plan ($1,250 to $6,350 if the plan covers one person, $2,500 to $12,700 if 2+ family members are covered).

Contributions vary, depending on client age and marital status. For 2014, the maximum contribution for a single-person policy is $3,300 (up to $4,300 if age 55+). For joint filers, a contribution of up to $6,550 ($8,550 if age 55+) can be made if the plan covers a spouse or family.

Prior to age 65, withdrawals used for non-medical purposes are subject to a 20% penalty. After age 65, withdrawals can be made for any reason. Contributions are pre-tax and earnings are tax-free if they are used for medical purposes, including dental work.

Surprisingly, almost no mutual fund company offers HSA accounts. The largest custodians for these types of accounts include: Optum Bank, J.P. Morgan, BenefitWallet, HSA Bank, and Wells Fargo. The website HSASearch provides detailed information about 90 HSA custodians, including their fee structure. Health Savings Administrators offers 22 low-cost Vanguard funds.

Tax StrategiesSince HSA contributions are deductible, the big concern is what happens after age 65. You client will no longer be able to make HSA contributions if covered by Medicare. If a client receives Social Security benefits, and covered by Medicare Part A, this too will likely end the ability to make contributions.

When the HSA account owner dies, the account passes to the designated beneficiary. Withdrawals are tax-free if used by the surviving spouse for qualifying expenses—withdrawals by a non-spouse are fully taxable as ordinary income. Accounts without a named beneficiary will automatically go to deceased’s estate.

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