Welcome to our comprehensive guide on Health Savings Accounts (HSAs), your ultimate resource to understanding the powerful financial tool designed to revolutionize healthcare expenses.
In this article, we will delve into the compelling tax benefits of HSAs and explore eligibility criteria for participation. Discover the contribution limits, establishment process, and how to choose the best HSA provider. Gain insight into qualified medical expenses, penalties for non-qualified withdrawals, and reporting requirements.
You’ll learn how HSAs can play a pivotal role in retirement planning and even become a thoughtful strategy for generational giving. Prepare to unlock the triple tax advantage and harness the potential of HSAs for a healthier and more financially secure future.
What is an HSA?
Health Savings Accounts (HSAs), as the name implies, are savings accounts for health care expenses. There are restrictions on who may contribute, how much and what counts as a qualified medical expense. It is worth exploring whether you have the opportunity to participate in these as they provide some compelling tax benefits.
What are the tax benefits of HSAs?
HSAs are tax-favorable in 3 ways:
- Contributions to an HSA are tax-deductible
- Earnings within an HSA grow tax-free
- Withdrawals for qualified medical expenses are tax-free
Who is eligible to contribute?
To be eligible, you must participate in a medical plan that covers certain preventive services and it must be a “High Deductible Health Plan” (HDHP). To be an HDHP, the plan must carry an annual deductible of at least $1,500/$3,000 (individual/family) and an out-of-pocket maximum of $7,500/$15,000 for individual/family coverage (these are 2023 figures and are indexed for inflation). You are ineligible if you are covered by Medicare, if you (or your spouse) participate in a Flexible Spending Account, or if you are a dependent on another person’s tax return.
How much can I contribute to an HSA?
In 2023, the contribution limits to an HSA are $3,850 individual and $7,750 family. If you’re over 55, you can make an additional $1,000 catch-up contribution. Contributions for 2023 can be made up until the tax filing deadline (April 15, 2024).
How do I establish an HSA?
You can create an account with a qualified HSA trustee (typically a bank, brokerage firm or insurance company). There may also be an HSA plan available through your medical plan at work and your employer may even make contributions to the plan on your behalf as an added incentive to participate. If you make contributions through your employer, you can avoid payroll taxes on the amount funds contributed. Even if an HSA is through your employer, the account belongs to you. HSAs are portable and you can use the funds at any time; there is no annual use-it-or-lose-it as with a flexible spending account.
Whom should I choose as an HSA provider?
Factors to consider would be service, convenience, flexibility and fees. Some HSA providers issue debit cards or checkbooks to make the withdrawal process simple. If there is a provider through your employer, it may be a good idea to default to that option given the payroll tax savings mentioned above.
What is a “qualified medical expense”?
Qualified medical expenses are generally those costs associated with your medical and dental care and are not reimbursed from another source (i.e., not covered by insurance). The expense cannot also be taken as an itemized deduction. Some non-traditional expenses may qualify such as home improvement and transportation costs due to a medical event. A portion of your long-term care premium may also count as a qualified medical expense.
What if I take a withdrawal for non-qualified reasons?
Non-qualified distributions are subject to ordinary income tax and a 20% penalty. If you’re 65 or older, you are not subject to the 20% penalty but still would be subject to income tax.
How do I report my HSA activity?
You must file Form 8889 if there were any contributions to (including employer contributions) or distributions from your HSA during the year. You can also pay yourself back for medical expenses in later years if you keep the receipts for those medical expenses paid for through normal cash flow. This would allow your HSA account to enjoy more compound growth by leaving the funds untouched in early years and simply paying yourself back anytime in the future.
What happens to my HSA when I die?
If your spouse is the named beneficiary, they get to treat the HSA as their own. Otherwise, the HSA will cease and will be includable as taxable income to your non-spouse beneficiary (or to the estate if no beneficiary is named). For this reason, it is important for a married account holder to name his/her spouse as the beneficiary.
Can an HSA help me in retirement?
The two biggest expenses for most people in retirement are taxes and health care. It’s estimated that the average person spends about $315,000 on healthcare during their retirement. This can be a daunting figure, especially if you don’t start saving early. Due to the triple tax benefit of HSAs mentioned earlier, they are one of the best vehicles for saving for healthcare costs in retirement. If you contributed and invested the maximum family amount to your HSA every year ($7,750) for 20 years you could have over $350,000. If you started saving even earlier and contributed for 30 years, you could have over $875,000 .
Can I make HSA contributions for my children?
In some cases, you may be able to make the full family maximum contribution to an HSA for your child ($7,750 in 2023), in addition to funding your own.
What makes your child qualify?
- Covered under parents’ High-Deductible Health Plan (HDHP)
- Not enrolled in Medicare
- Not claimed as a dependent on someone else’s tax return
- Earned income is not necessary
You can leave your children on your healthcare coverage up to the age of 26, which makes this a great opportunity to gift to your kids in their early working years. In this scenario you would be able to contribute $7,750 for your own HSA and for each of your children. Making these contributions early can set them up for success in life and retirement when medical expenses arise.
Even if this specific situation doesn’t apply to your family, you can gift your child the amount to fully fund a single HSA account ($3,850 in 2023), as this is still one of the most tax efficient ways to save and invest.
There are many more questions that one could ask about HSAs and the rules can get quite complex. For more information, see Tax Secrets of Health Savings Accounts. For a detailed description, see IRS Publication 969. To learn more about how HSAs can fit into your wealth-building strategy, schedule a consultation with a Greenspring advisor today.
Contributing Authors: interns Maya Monsour and Rohan Sagar.
