As healthcare costs continue to increase year after year, I often think about the most efficient way to not only pay for medical expenses as they occur, but also how to save for future expected and unexpected medical expenses. We are going to highlight the benefits of HSAs and clear up some common misconceptions. Health Savings Accounts (HSAs) are a valuable tool for managing healthcare expenses and saving for the future. Unfortunately, they are often overlooked or misunderstood.
Are You Eligible?
To contribute to an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP) for the current year, with a minimum deductible of $1,500 for individuals and $3,000 for families. If you meet these criteria, you can contribute up to $3,850 for individual coverage and $7,750 for family coverage. These contribution limits are adjusted annually to account for inflation and the cost of living.
Understanding Qualified Medical Expenses
HSAs offer significant tax advantages when used for qualified medical expenses. These expenses include doctor visits, co-pays, surgeries, prescriptions, chiropractic visits, therapy, and more. You can even use your HSA to cover eyeglasses, contacts, and massages if they are medically necessary. It’s crucial to keep records and receipts of your expenses, and when in doubt, consult a CPA.
Flexible Use of Funds
There are two ways to use your HSA funds: with an HSA-specific debit card or by paying with your personal credit or debit card and reimbursing yourself later. Importantly, there is no time requirement for reimbursing qualified medical expenses. This means you can pay for expenses out of pocket today, save the receipts, and reimburse yourself in the future, allowing your HSA to continue growing tax-free. However, maintaining meticulous records is essential for this approach.
The Power of Investment
One of the most significant advantages of HSAs is their potential for compound growth through investments. Most HSA custodians require a minimum cash balance, usually between $1,000 and $2,000. Any amount beyond this can be invested, and the earnings will be tax-free if used for qualified medical expenses. This triple tax advantage makes HSAs a powerful long-term savings tool.
No ‘Use It or Lose It’ Rule
Unlike Flexible Spending Accounts (FSAs), HSAs are not subject to a ‘use it or lose it’ rule. Any money you contribute to an HSA remains with you for life, even if you change jobs or health insurance plans. You can continue using the HSA for qualified medical expenses or treat it as a traditional IRA at age 65, in which case non-qualified medical expenses would be subject to regular income tax.
HSA vs FSA
It’s essential to understand the difference between HSAs and FSAs. HSAs are for saving and can be carried over indefinitely, while FSAs are for spending and usually require using the funds within the same year. If you have a good estimate of your medical expenses for the year, contributing to both accounts can be beneficial.
Considerations and Downsides
The primary downside of HSAs is the 20% penalty and income tax you’ll incur if you use the funds for non-medical expenses before the age of 65. It’s crucial to prioritize the use of HSA funds for qualified medical expenses to fully enjoy the tax advantages.
Planning for the Future
Upon reaching age 65, you can withdraw funds from your HSA without the 20% penalty for non-qualified expenses. However, these distributions will be treated as regular income, similar to distributions from an IRA or a 401(k) plan. Additionally, choosing the right beneficiary for your HSA is important, as it will affect how the funds are treated upon your passing.
Health Savings Accounts can be a powerful tool for managing healthcare expenses, saving for the future, and enjoying substantial tax advantages. If you are considering establishing an HSA or would like to review your current contributions, you can reach us at 385-374-1665 to schedule a meeting. We are here to talk through the benefits of not only taking care of your physical health but your financial health as well.
Danny has a passion for serving successful families and making a positive impact in their lives. With over a decade of experience in the financial services and banking industry, Danny creates personalized retirement and financial plans for families to help them achieve their financial and family goals throughout their life. Danny’s experience in serving some of Park City’s most established families along with the deep expertise and services of the Solidarity Wealth team allow Danny the opportunity to serve a growing number of successful families.
Prior to joining Solidarity Wealth, Danny served as a Wealth Advisor at another firm and before that spent 12 years at Wells Fargo in Park City as a regional private banker. At Wells Fargo, Danny was responsible for developing lifelong relationships with families, while developing tailored banking, credit, and retirement solutions to help his clients be successful in their financial journey.
Danny has his Bachelor’s degree in Business Management and holds the Certified Private Wealth Advisor® designation. Danny and his wife, Lindsay, are Park City natives and they are raising their own family. In his free time, Danny is an avid golfer, and skier, and enjoys spending time with his family.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.