Utilizing Your Health Savings Account to Pay Long-Term Care Premiums

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Nov 01, 2020

By Sarah Nolte, CFP® Investment Advisor Representative at World Trend Financial

Sarah NolteA Health Savings Account (HSA) can be a versatile tool to help you address the increasing cost of health care as you prepare for retirement. Contributions to your HSA are tax-deductible and grow tax deferred. Distributions from your HSA are also tax-free if used for qualified medical expenses. Long-term care insurance premiums are included as qualified medical expenses with the maximum annual tax-free amount based on your age. If you and your spouse both have long-term care policies, you can each use money tax-free from your HSA to pay premiums, up to the aged-based maximum for each of you (based on your ages at the end of the year). These limits increase slightly each year for inflation.

To qualify for the tax-free HSA withdrawal, your long-term care insurance policy must meet the definition of qualified long-term care insurance according to the guidelines set forth by Internal Revenue Code Section 7702B. This means your long-term care policy must be guaranteed renewable, provide inflation protection, may only pay for long-term care expenses, and must not contain any cash value. Traditional stand-alone long-term care insurance policies will generally meet this definition. Hybrid long-term care policies may not be structured properly to afford you with the ability to utilize an HSA withdrawal for long-term care insurance premiums.

You may request a tax-free HSA withdrawal, but only up to the insured's age-based limit. Following are the age-based limits in 2020 for tax-free withdrawal of long-term care insurance premiums from your Health Savings Account. Any premium amounts due for the year above these limits are not considered to be a medical expense.

Ages 40 & under $430

Ages 41-50 $810

Ages 51-60 $1630

Ages 61-70 $4350

Ages 71+ $5430

If you do not have an HSA, or if you do not use your HSA to pay your long-term care insurance expenses, your premiums may still be deductible up to the age-based limits above. To qualify for the medical expense deduction, you must itemize on your taxes which fewer people are currently able to do.

The increasing cost of health care is likely top of mind as you consider retirement. Fortunately, you do have opportunities to efficiently pay for healthcare costs. If you have a Health Savings Account, funding long-term care insurance premiums through tax free withdrawals is a great opportunity.

If you would like to look at the cost of long-term care or learn more about efficient ways to utilize your Health Savings Account, please reach out to Sarah at snolte@tld-inc.com, or any of the investment advisor representatives at World Trend Financial. They can be reached at 319-364-3041 in Cedar Rapids, or 319-339-4884 in Iowa City.