With healthcare expenses on the rise, we regularly meet with people who have questions about health savings accounts (HSAs). A health savings account can be a powerful tool in your financial planning arsenal. Yet, we rarely see people utilizing them to their fullest potential. Here we discuss how an HSA could benefit you.
What Is an HSA?
An HSA is a tax-advantaged savings account for people with certain types of health insurance plans. Savings can be used to pay for medical expenses at any time on a pre-tax basis. Any unused HSA savings accumulate and can be used in future years, including throughout retirement.
Do You Qualify?
To be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan. A high-deductible health plan has lower premiums, but you will have to pay more out-of-pocket before your insurance starts helping to pay for medical expenses.
For example, the 2022 deductible requirements to qualify as a high-deductible, HSA-compatible plan are $1,400 for an individual and $2,800 for a family plan.
2022 Annual Contribution Limits
If your health care plan is compatible based upon meeting the high deductible threshold requirements, you may contribute up to the following amounts to your HSA in 2022:
- Single $3,650
- Joint or Family $7,300
- If you are age 55+ you may make an additional $1,000 catch-up contribution.
These contribution limits are inflation-adjusted each year (See IRS Publication 969).
Even though you can maintain an HSA for as long as you want, your eligibility to make annual contributions ends if you are no longer covered by a high-deductible health insurance plan. You also are no longer eligible to make contributions starting the month you switch to Medicare.
- When you contribute money to an HSA, it is done on a pre-tax basis. If you have an HSA through your employer, you may be able to make pre-tax contributions directly through payroll. Your contributions will be reported as deductible HSA contributions on your W-2. Any additional contributions made for your benefit by your employer are not tax-deductible. If you don’t have the ability to make HSA contributions through your payroll, or you’re self-employed, you can make direct contributions to an HSA account and deduct your contributions when completing your annual income taxes.
- You can invest the money in an HSA, therefore, you can grow the money long-term just as you would a retirement investment account. This can essentially double the tax benefit by gaining a deduction and tax-free growth, if invested. If you need withdrawals for current or short-term medical expenses, it’s best to keep the contribution in cash and forgo the growth possibility to reduce risk. Conversely, if you plan to retain a savings balance, a portion can be invested for long-term growth potential.
- The money in an HSA grows tax–free and doesn’t have to be used in the year you make contributions. In fact, some people use it like an investment account for retirement with the benefit of being able to make tax-free withdrawals in medical emergencies.
- Withdrawals from an HSA are completely tax–free at any age if withdrawals cover a qualified medical expense. The definition of qualified medical expenses is fairly broad. For example, it includes over-the-counter medicines. If you utilize the HSA for non-medical expenses before age 65, the withdrawals will be taxed as ordinary income and a 20% penalty may apply. Non-medical withdrawals made after age 65 are still taxed as ordinary income (same as your 401(k), IRA, etc.), but the 20% penalty no longer applies. See IRS Publication 502 for a list of medical expenses that can be paid from the account.
- If your HSA is made through your employer, you may receive employer matching contributions. Like a 401(k) match, this is essentially “free money.”
- An HSA is the only triple tax benefit (pre-tax or tax-deductible contribution, tax-free growth, tax-free distributions for qualified medical expenses) vehicle available.
Getting the Most Out of Your HSA
To get the most out of an HSA, it’s important to plan and invest the funds within your HSA purposefully. An HSA is a fantastic tool when properly implemented in your overall financial plan but might not be the best option if it’s coming at the expense of your establishing an emergency reserve, funding retirement accounts, or saving for a child’s education for instance.
You can use an HSA to pay for qualified medical expenses before and during retirement, including Medicare premiums, as well as out-of-pocket costs not covered by Medicare, such as dental, vision and hearing. You can also use it to pay long-term care insurance premiums, up to a maximum annual tax-free amount based upon your age.
Keep Your Receipts
Remember to keep receipts for out-of-pocket medical expenses as you can reimburse yourself years down the road from an HSA if it was a qualified medical expense and occurred after you opened the account.
An HSA is not for everybody, but it can be a powerful tool when properly integrated as part of your overall financial planning picture. Your SageVest advisor is happy to discuss if one of these accounts is right for you and where to open the account.
Our job at SageVest Wealth Management is to consider the totality of your finances. We create comprehensive strategies, implement decisions, actively manage investments, collaborate with allied professionals, and proactively think on your behalf. Contact us to see how this approach ensures your financial decisions work together in unison, giving you the confidence you need, and the time you want, to pursue what matters most.