- May 1, 2023
- Financial Synergies Wealth Advisors
Used properly and in the right situations, Health Savings Accounts (HSA) can provide triple tax benefits to account holders. Often, higher-income households inquire about Health Savings Accounts because they have heard about what an HSA can potentially offer them: a pool of tax-exempt dollars for health care, a path to tax savings, even a possible source of retirement income after age 65. You may want to look at this option yourself.
You must enroll in a high-deductible health plan (HDHP) to have one, a health insurance option that is not ideal for everybody. You fund an HSA with tax deductible contributions. Some employers will even provide a matching contribution on your behalf.
HSAs offer you three potential opportunities for tax savings. Your account contributions are tax deductible (potentially tax-free), the earnings in your account grow tax free, and you can withdraw funds from your HSA, tax free, so long as they are used to pay for qualified health care expenses, such as deductibles, co-payments, and hospitalization costs. (HSA funds may not be used to pay health insurance premiums.)
HSA Tax Benefits. A large draw for many are the tax benefits inherent to HSAs:
- Contributions through an employer are always pre-tax
- You can invest the funds after your account balance reaches a certain level
- Distributions for qualified health expenses aren’t taxable
At age 65, you can even turn to your HSA for retirement income. Current federal tax laws allow an HSA owner 65 and older to withdraw HSA funds for any purpose, penalty free. You can use an HSA to pay Medicare premiums (other than premiums for a Medicare supplemental policy, such as Medigap) or extended-care insurance premiums. No Required Minimum Distributions (RMDs) are ever required of HSA owners. Keep in mind, however, if you take a distribution that is not used for a qualified medical expense, the money may be taxable and a penalty could apply, depending on your age.
IMPORTANT: At age 65, you are able to use an existing HSA, but the first month you are enrolled in Medicare you are no longer eligible to contribute. This also applies to periods of coverage that may have been retroactive. Learn more about HSAs and Medicare HERE.
Why is an HSA less attractive for some people?
Well, the first thing to mention is the related high-deductible health plan. When you enroll in one of these plans, you agree to pay all (or nearly all) of the cost of medicines, hospital stays, and doctor and dentist visits out of your pocket until that high insurance deductible is reached.
The other hurdle is just saving the money. If you pay for your own health insurance, just meeting the monthly premiums can be a challenge, especially if your household contends with other significant financial pressures. There may not be enough money left over to fund an HSA. Also, if you are a senior (or a younger adult) with a chronic condition or illnesses, you may end up spending all of your annual HSA contribution and reducing your HSA balance to zero year after year. That works against one of the objectives of the HSA – the goal of accumulation, of growing a tax-advantaged health care fund over time.
Additionally, unlike a Flexible Spending Account (FSA), which is funded with pre-tax dollars but must be used by a specific deadline, HSA contributions can remain in your account to be used for future medical bills at any time. In short, this means there is no “use it or lose it” penalty.
Keep in mind that if you spend your HSA funds for non-qualified expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for non-qualified expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.
How to use your HSA. The Internal Revenue Service (IRS) or your HSA provider are great sources when getting started. For example, the IRS recently issued a reminder that at-home covid tests, face masks, and sanitizing wipes can all be purchased, or qualify for reimbursement, through an HSA. In addition, the IRS offers an interactive assessment tool that can take the guesswork out of what qualifies as an HSA-friendly expense.
If you would like to explore opening an HSA, your first step is to consult a financial advisor or insurance professional to see if you can enroll in a qualified HDHP, unless your employer already sponsors such a plan. Finding an HSA provider is next.
2023 HSA contribution limits
The HSA contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
Concerns or questions about your financial plan or tax situation? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate markets and developing custom financial plans. To learn more about our approach to financial planning please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
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