Health Savings Accounts can be an effective tool to reduce income taxation today while saving for both future healthcare and retirement expenses. Coordinating your saving levels between an HSA and other tax-advantaged saving vehicles requires careful consideration and planning.
What is a Health Savings Account (HSA)?
Health Savings Accounts (HSA) are tax-advantaged personal savings accounts that can help individuals and families save and pay for out-of-pocket medical expenses now and in the future.
Who is eligible to open an HSA?
To open and fund an HSA, you must be enrolled in a high-deductible health insurance plan. For 2021, a high-deductible plan is defined as having a minimum annual deductible of $1,400 for single coverage or $2,800 for family coverage and with out-of-pocket maximums of $7,000 for individuals and $14,000 for families (including deductible, copayments, and coinsurance but not premiums).
If your health plan qualifies you to utilize an HSA, individuals may contribute $3,600 per year. Those with family coverage are allowed to contribute $7,200. Individuals above the age of 55 may make an additional catch-up contribution of $1,000 per year.
Employers may also decide to contribute to a qualified employee’s account. The total combined employer and employee contributions to an HSA cannot exceed the annual limit set by the IRS.
What are the advantages of opening an HSA?
HSAs are the only triple-tax-advantaged accounts available to individuals. This means that your dollars: 1. are contributed pre-tax; 2. grow tax-free, and; 3. may be withdrawn tax-free (for qualified medical expenses). This is a material combination of tax benefits for HSA contributors.
In addition, HSA balances can be invested, providing owners the potential to grow over time that portion of their asset base dedicated to paying for future health care expenses. Income and appreciation earned from investing in your HSA is also tax-free, a significant advantage.
Additional benefits of HSA accounts include portability (meaning you can take it with you even if you change jobs) and the ability to use HSA funds for the medical expenses of spouses and dependents.
How are HSAs different from Flexible Spending Accounts?
Beyond the advantages mentioned above, a key difference between HSAs and Flexible Spending Accounts (FSAs) is that HSA funds not used in a calendar year aren’t then foregone by the owner (as FSA balances are). In other words, HSAs have no “use it or lose it” designation, and so can accumulate for the benefit of the owner and their dependents over multiple years.
If I am on Medicare, can I open an HSA?
Unfortunately, Medicare participants cannot open or contribute to an HSA. You can, however, use an already-funded HSA to cover out-of-pocket medical expenses during Medicare coverage.
Where can I use an HSA?
Common qualified medical expenses HSA funds include doctor’s office visits and copays, surgery, eye exams, dental treatment, flu shots, physical therapy, prescription drugs, and over-the-counter medicines. A full list of qualified medical expenses is outlined here.
Can I use HSA dollars for non-medical expenses?
Importantly, you cannot. If you use HSA funds to pay for an ineligible (non-medical) expense, you must report it on your annual income tax return and pay related income taxes along with a 20% penalty.
At the age of 65, HSAs are effectively the same as an IRA or 401(k), in that owners can use the assets for non-medical expenses without incurring the 20% penalty. In this circumstance, withdrawals are subject to ordinary income taxes just like distributions from retirement accounts are.
We hope this is helpful to those who may have an interest in learning about this potentially-advantageous tool. Please note the disclosure below as we want to be clear that neither we individually nor Resonant Capital Advisors, LLC as a firm provide tax advice. We encourage you to speak with a tax planner on the tax treatment of HSA savings and end usage. We at Resonant are happy to work directly with you and your other advisors in discussing whether an HSA account might make sense for your circumstances.