Overview
Health Savings Accounts (HSAs) allow people who are enrolled in high-deductible health plans (HDHP) to receive tax-advantaged treatment on money saved, invested and used for qualified medical expenses. To be eligible to use a HSA, you need to meet the following conditions:
- You must be covered by a HDHP that meets IRS requirements
- You cannot be enrolled in another health insurance plan
- You cannot be claimed as a dependent on another person’s tax return
- You cannot be eligible for Medicare
Tax-Advantages
HSAs are attractive because the money you contribute is pre-tax, investment earnings in the account grow tax-deferred and withdrawals are tax-free if used for qualified medical expenses. This means this money is never taxed. Can you think of another type of account that provides similar treatment? Roth IRAs are taxed at contribution. Traditional IRAs are taxed on withdrawal. Taxable accounts are taxed each year. Although they have only been around since 2003, HSAs are a phenomenal financial planning vehicle for those who are covered by a HDHP.
Financial Planning Vehicle
Not only does the HSA account provide an unbeatable tax advantage, but the account does not require a “use it or lose it” condition, unlike flexible spending accounts (FSAs). Depending on the HSA manager, your HSA can be invested in a variety of mutual funds or ETFs. If you expect significant health care costs in the future, you could invest your contributions aggressively, in hopes of earning a higher expected return over time, and use the funds for qualified medical expenses in the future. After age 65, if you decide not to use the money for qualified medical expenses, you can pay income tax on withdrawals for any other purposes. If you want to use the money for non-qualified expenses before age 65, the amount withdrawn will be assessed an additional 20% tax penalty, on top of paying income tax.
As is the case with most planning, it is important to save receipts in order to be reimbursed for your qualified medical expenses. You need to track your spending made from the HSA. Even if you paid for something ten years ago, if the HSA was established at the time, you can still reimburse yourself if you have the receipt today. Your account can grow tax-deferred and still be used to pay for expenses incurred in the past, making a HSA an ideal planning tool.
Contribution Limits
If you are eligible for an HSA, you can contribute up to $3,250 (individual) and $6,450 (family) annually. Similar to IRAs, people age 55 and older can contribute an additional $1,000 per year on top of the annual limit.
Qualified Expenses
There is a very comprehensive list on the IRS website of qualified expenses that can be found here: http://www.irs.gov/publications/p502/index.html
Some common qualified expenses:
- Diabetic supplies
- Dental cleanings and fillings
- Eyes exams
- Eyeglasses
- Contact lenses
- Prescription services
- Surgery
For people not enrolled in a traditional health insurance plan, HSAs are an excellent option to consider. As a vehicle that is never taxed (if used properly), it presents a unique planning opportunity. An HSA can be used alongside many other planning vehicles in your financial plan. One of the interesting qualities of an HSA is that you can reimburse yourself many years down the road, allowing your account to continue growing tax-deferred.
The flexibility of a HSA means there are many ways to utilize one. If you have questions about using a HSA within your overall financial plan, or would like investment recommendations for your account, feel free to reach out to an Empirical Advisor.
