If you have a qualifying health insurance plan, the Health Savings Account (HSA) is one of the few investment vehicles that allow for a triple tax advantage. That is, contributions to an HSA are tax-deductible, the account grows tax-free, and if you withdraw the funds for medical expenses, those withdrawals are also tax-free. With tax benefits that surpass traditional and Roth IRAs and 401(k)s, it is easy to see why financial planners love these accounts! We have written about the HSA in the past and encourage you to check out this blog post to learn more about what type of health insurance you would need, and exactly which expenses qualify as “medical expenses” for disbursement.
With that said, the year is coming to an end and open-enrollment periods for health insurance are upon us. We thought it would be a good opportunity to revisit the HSA and talk about some of its lesser-known benefits and strategies.
DID YOU KNOW?
- Your HSA can be invested in the stock market. In fact, we recommend it for most of our clients. We consider the HSA to be another retirement account, right alongside your IRA or 401(k).
- You can reimburse yourself for health expenses paid in previous years. If you would rather not spend down your HSA, and instead take advantage of the tax-free growth, you can pay your medical expenses with other dollars and save the receipts. If you need access to the money down the road, you can reimburse yourself for all those previous years of medical expenses, and the money still comes out tax- and penalty-free.
- At age 65, you can take penalty-free distributions from your HSA for any reason. Without qualifying medical expenses, you will still be on the hook for income tax on those withdrawals, but that is the same tax treatment as traditional IRA or 401(k). The HSA is like an IRA with options.
- Although you can’t contribute to an HSA once you’re on Medicare (including part A), you can use your existing HSA to pay your Medicare Part B, Part D, and Medicare Advantage premiums. That is in addition to any other deductibles, copays, and coinsurances you may have in retirement.
- If someone is not your tax dependent but is still included on your HSA-qualifying health insurance plan, they can have their own, separate HSA, and contribute to it at the family level. This is common with younger adult children. If this describes you, not only can mom and dad contribute $7,750 (in 2023) to a plan, but their kids can contribute the same amount into separate plans! The extra $7,750 contributions can even be gifts from the parents.
Talk to your advisor about your options and find out if an HSA makes sense for you. If you already have an HSA and qualifying health insurance, make sure you’ve made your 2022 contributions. The contribution limits for 2022 are $3,650 for self-only and $7,300 for families. If you’re over the age of 55, you can also make an additional “catch-up” contribution of $1,000.