Health Savings Account

 

Why are Health Savings Accounts so Powerful?

A Health Savings Account, more commonly referred to as an “HSA”, is an account that can help pay for medical expenses now and in the future.  An HSA is very unique in that it is the only investment in the tax code that is ‘triple tax-exempt’, meaning they have 3 tax advantages

 
 
 

1

contributions you make are tax-deductible (or not taxable to you if made on your behalf by your employer)

2

the funds grow tax-free (interest, dividends, and capital gains are not taxable)

3

withdraws are tax-free as long as they are used for eligible “qualified medical expenses”

 
 

Because HSA’s have such superior tax advantages, if you are eligible, we typically recommend maxing HSA contributions every year (after you have put enough into your 401(k) plan to get the full company match).

 
 
 
 

Do you qualify for an HSA?

Unfortunately not everyone can contribute to an HSA.  Before you can open an account and contribute the IRS says you must have a ‘high deductible health insurance plan’. This means your health plan’s deductible must meet the following qualifications:

  • Individual Plan
    $1,350 deductible (or higher), with max $6,750 out-of-pocket

  • Family Plan
    $2,700 deductible (or higher), with max $13,5000 out-of-pocket maximum

Note, you cannot contribute to your HSA after you sign up for Medicare, which is typically age 65.

 

How much can you contribute to your HSA?

2019 LIMITS


 

2020 LIMITS


 

HSA Contribution Limit [Employee + Employer]
Single Coverage / $3,500.00
Family Coverage / $7,000.00

HSA Catch-Up Contributions [Age 55 and Older]
Single Coverage / +$1,000.00
Family Coverage / +$1,000.00

 

HSA Contribution Limit [Employee + Employer]
Single Coverage / $3,550.00
Family Coverage / $7,100.00

HSA Catch-Up Contributions [Age 55 and Older]
Single Coverage / +$1,000.00
Family Coverage / +$1,000.00

 
 

How can my HSA funds be invested?

Another nice benefit for HSA’s is that they can be invested in the stock market.  If you do not need to use your HSA funds for any immediate medical needs, the funds can be invested in mutual funds so that they can grow tax-free for future use!  This is a major advantage over a Flexible Spending Account (FSA) which does not allow funds to be carried over from year to year under the “use-it-or-lose-it” rules.

 

How can you spend your HSA?

You will be given a debit card linked to your HSA and can use any available cash for eligible expenses for yourself, spouse and kids.  Eligible “Qualified medical expenses” include pretty much anything medical related. Some examples are:

  • Doctors visits, physical exams, and flu shots

  • Prescription drugs and over-the-counter medicine

  • Medical supplies and lab tests

  • Dental and vision (including glasses, contact lenses, and hearing aids)

  • Physical therapy and Chiropractic services

  • Co-insurance, copayments, and deductibles

  • Long term care insurance and COBRA

  • Medicare premiums (but not supplemental policies like Medigap)

Note, insurance premiums cannot be paid for using HSA funds

Although the list is pretty extensive, be sure not to use HSA funds for non-qualified expenses.  If you do you will pay tax on the amount withdrawn plus a 20% tax penalty!

 

Other HSA benefits

no social security tax on contributions

Contributions made thru payroll deductions are not subject to the 7.65% Social Security and Medicare taxes (unlike 401(k) deferrals)

NO RMD REQUIREMENTS

There are no minimum required distributions from HSA’s after age 70 ½ like other retirement accounts

delaying hsa contributions

There is no rule stating that you must use your HSA funds at the time you incur medical expense.  A powerful planning strategy is max out your HSA contributions each year, then invest the money so that they can grow tax-free and compound over time.  In the meantime, you can pay for any medical expenses that come up out-of-pocket. Later, in retirement, you can withdraw the HSA funds to reimburse yourself for prior year medical expenses after the HSA has had years to grow tax-free!  Note, if you implement this strategy you will need to make sure you keep proof of prior year medical expenses (i.e. receipts) so that you can substantiate them if you get audited in the future.

 

To learn more about Health Savings Accounts (HSA) and their many benefits

 
 
HSAVictoria Haidar