The Power Of Health Savings Accounts
Your Health Savings Account (HSA) is an important aspect of protecting your overall financial health in the event of physical health issues. Healthcare is an expense that never goes away. We need to be actively planning to cover healthcare expenses now and into the future. Medical expenses are capable of derailing the best financial plan now and in retirement. Just as healthcare is one of the largest expenses people face while working, healthcare is also one of the biggest expenses in retirement. Medicare doesn’t cover everything, and healthcare costs tend to increase over time. Health Savings Accounts (HSAs) were created to help people put aside money for the expense of healthcare in retirement – and thanks to inflation, they can now be even more beneficial.
HSAs have always been an excellent way to accumulate a growing pool of funds that can be used for healthcare expenses later in life. Because the annual contribution amounts are tied to the inflation rate, the increase in the annual contribution limit for 2023 was significant, increasing approximately 5.5% over the 2022 contribution limits.
These accounts allow individuals and families to accumulate savings in a “triple-tax-advantaged” way:
Contributions are in pre-tax dollars, so they lower taxable income in the year they are made
Accounts grow tax-free
There are no taxes on withdrawals as long as they are spent on qualified expenses
What Is a Health Savings Account?
HSAs are a type of savings or investment account that allows money to be put away before taxes and then used for qualified medical expenses. These include deductibles, copayments, coinsurance, long-term care, and other healthcare costs. HSAs were created to be paired with high deductible health plans (HDHP), and this type of health care plan is required to be eligible to contribute to an HSA. An HDHP usually has a lower monthly premium in exchange for a higher annual deductible.
What Are the Benefits?
Saving in an HSA has benefits now and in retirement. Contributions can often be made through your workplace with before-tax payroll deductions. You can take a tax deduction if you choose to fund an HSA with after-tax dollars.
While you can use your HSA for current medical costs, if you don’t draw on your HSA before retirement, you create the potential to maximize the power of compounding. The account grows tax-free, and when you withdraw funds in retirement for qualified medical expenses, the funds aren’t taxed as income, like those in other tax-advantaged accounts.
While you may change jobs and health insurance providers, the HSA is your account and is unaffected.
The funds in an HSA never expire and can even become part of your estate plan.
What Are the Contribution Limits?
The contribution limits are linked to inflation, so the increase for 2023 was significant. Individuals who have self-only insurance coverage and a high-deductible health care plan can contribute up to $3,850. Family coverage is eligible for a contribution of up to $7750. There’s also a $1,000 catch-up contribution for those aged 55 and above.
How Do They Work?
The list of qualified medical expenses is extensive and includes things like acupuncture, doctor visits, psychological therapy/psychiatric care, hearing aids, and prescription drugs, among other things. You’ll need to keep receipts, but the accounts are often online and may even provide you with a debit card.
If you select an investment account, you’ll have investment options to choose from. These options may have fees associated with them, and the accounts themselves may have fees, but there’s a lot to choose from, and finding lower-cost options is possible. If you do select an investment account, these accounts generally have a minimum amount of cash that you have to maintain in the account in case a medical expense does arise. The remainder of the funds can be positioned within the investment options that the account provides - similar to most employer sponsored plans (401k, 403b, etc.).
Are There Any Limitations?
Just like other tax-advantaged accounts, if you don’t follow the rules, you may be hit with a tax penalty. If you withdraw funds from your HSA before age 65, either for non-medical costs or unqualified medical costs, you’ll have to pay the federal income tax on the amount and pay a 20% tax penalty.
If you are 65 or over and take out funds for non-medical or unqualified medical costs, you still have to pay the federal income tax on the amount, but you won’t get hit with the 20% tax penalty.
The Bottom Line
Health Savings Accounts are a way to save and invest money for one of the biggest expenses in retirement. The amounts you can contribute are significant, and it may make sense to consider opening an account or increasing your contribution to an existing account. If you have questions about Health Savings Accounts, if you are eligible to participate in a Health Savings Account, how to invest your dollars in your Health Savings Account, or are just curious to find out more, please use this link to schedule a conversation: HSA Conversation.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.