Health Savings Account Tips
No other tax-advantaged savings or wealth accumulation vehicle in the tax code available to individuals even comes close. HSAs provide unrivaled tax benefits for those who contribute to them and use them for healthcare expenditures as Congress intended.
HSA tax benefits are four-fold:
- Contributions are pre-tax.
- Growth is tax-deferred.
- Distributions to pay qualified healthcare costs are tax-free.
- HSA money is available to use to supplement your retirement, penalty-free after 65. You just pay income taxes on withdrawals.
The catch: To contribute, you must be a member of a qualified high-deductible health plan or enroll in the HSA MEC plan, which accomplishes the same thing, and meet a few other basic eligibility requirements.
This guide will walk you through the basics of HSAs, and then provide some practical, actionable tips and best practices to help you maximize the benefits of your HSA, both in the short-run and over time.
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Health Savings Accounts Are Exploding in Popularity
HSAs have witnessed exponential growth since their inception in 2003.
From about eight million accounts holding nearly $16 billion a decade ago, there were about 36 million accounts with over $104 billion in assets by the end of 2022.
The evolution of HSAs reflects a growing awareness among both financial advisors and consumers about the benefits of proactive health and financial planning.
Unrivaled Tax Advantages of a Health Savings Account
One of the most compelling features of HSAs is their unique set of tax benefits, which are unmatched by any other savings account.
If you use your HSA exclusively for healthcare expenditures, the HSA even receives better tax treatment than life insurance.
No Income Limitations
Unlike Roth IRAs and other tax-advantaged savings vehicles, HSAs have no income limitations or phaseouts on either contributions or distributions. No matter how much income you make, you can still contribute the maximum to your HSA each year you are covered by an HDHP.
And you can still make tax-free withdrawals to pay qualified healthcare expenditures.
1. Get Health Savings Account Eligible
The magic can’t happen if you can’t contribute to an HSA in the first place!
First, you must either enroll in a qualified high-deductible health plan (HDHP), or, if you are a business owner, self-employed, or you have verifiable investment income, can enroll in the HSA MEC.
We’ll discuss both options below.
What is a High Deductible Health Plan?
A High-Deductible Health Plan (HDHP) is a type of health insurance plan characterized by a higher deductible compared to traditional insurance plans.
Here’s a breakdown of its key features:
- Higher Deductibles. The defining feature of an HDHP is the high deductible amount. This means you’ll need to pay more for your healthcare services before insurance kicks in, which can lead to lower monthly premiums.
- Lower Premiums. Because of the higher deductible, HDHPs typically offer lower monthly premiums. This can make them a cost-effective option for individuals who do not frequently require medical services.
- Preventive Care. Despite the high deductible, HDHPs usually cover preventive services like screenings and vaccinations at no cost to you, even before you’ve met the deductible.
- Out-of-Pocket Maximums. HDHPs include an out-of-pocket maximum, which limits the total amount you’re responsible for paying in a year. Once you reach this limit, the plan covers 100% of covered expenses.
HDHPs can be a great choice for individuals who are generally healthy and have fewer medical expenses, as they can save on premiums.
The idea is that you take some or all of your savings in premiums and route them into pre-tax contributions to your HSA.
That way, when you do have medical expenses in the future, the money will be there in the HSA to help you pay the higher deductible.
And because you’re using an HSA, you can essentially pay your deductibles and other healthcare costs with tax-free dollars.
Note: It’s important to use your HSA assets for healthcare costs. Withdrawals under age 65 for anything other than healthcare costs are subject to income taxes, plus a steep 20% penalty.
The 20% penalty goes away at age 65, however.
Maximize Your Savings: Join a Health Sharing Plan and Enroll in HSA MEC
If you are not already in a health sharing plan, it’s something to consider. Especially if you don’t get an Obamacare subsidy and you’re in good health with no pre-existing conditions.
Health share plans are not insurance policies. Instead, they are non-profit mutual aid organizations that help like-minded, health-conscious members pool their resources and help other members pay unexpected medical bills.
Many health share organizations have thousands of members, and have tremendous sharing power. This is important when it comes to cost sharing for catastrophic needs. If you have a medical incident that costs hundreds of thousands of dollars, it’s important to know that your health sharing organization is big enough to absorb it, and continue sharing.
Make Your Health Share Plan HSA-Compatible
Most health share plans are not by themselves compatible with HSA contributions.
That’s because they aren’t even insurance products – much less HDHPs.
But if you have business or self-employment income, there’s an easy and affordable workaround: Keep your health share plan, and enroll in HSA MEC.
This is a stripped-down, streamlined, limited benefit plan that just provides a few preventative care benefits. It’s designed to meet the basic requirements to get you eligible to make HSA contributions – without adding a lot of cost.
The HSA MEC is available via HSA For America. Get an HSA MEC quote, and enroll here.
For a free consultation and enrollment assistance, make an appointment with one of our expert Personal Benefits Managers.
Other Health Savings Account Eligibility Requirements
In addition to being covered by an HDHP or the HSA MEC, you must meet these requirements to contribute to an HSA:
- You cannot be covered by another plan, such as Medicare, Medicaid, TRICARE, or TRICARE For Life.
- You cannot have used VA health benefits in the last three months, other than for screening or disregarded services.
- You cannot be eligible to be claimed as a dependent on someone else’s tax return.
2. Contribute as Much As You Can to Your Health Savings Account
The more you can contribute to your HSA, the greater your tax benefits will be, both in the current year and in the future.
Every dollar you contribute reduces your taxable income by a dollar.
As of 2024, you can contribute up to $4,150 for a self-only plan, and up to $8,300 for families.
People over age 55 can contribute an additional $1000.
Note: HSAs are an “above-the-line” deduction. You do not have to itemize to take full advantage of the HSA. You can take the standard deduction.
Tip: Opt For Salary Reduction Contributions.
If your employer offers an HSA, consider contributing through a salary reduction agreement.
This method is more tax-efficient as it reduces your taxable income and saves you from paying FICA taxes. For business owners, choosing between direct contributions and salary reduction can have significant tax implications.
3. Understand Qualified Expenses
Knowing what qualifies as a medical expense is crucial for maximizing your HSA.
IRS Publication 502 provides a detailed list of eligible expenses, which includes not just traditional medical treatments but also many over-the-counter medications and health-related items.
4. Put Your HSA Into Overdrive With Self-Directed Investing
You aren’t restricted to cash and cash equivalents when it comes to your Health Savings Account.
If you are willing to accept more investment risk in the expectation of a greater return over time, you can also invest your HSA assets in a wide range of asset classes, including stocks, bonds, and mutual funds.
You can do this via self-directed investing.
Different HSA custodians and banks have different rules about what you can invest in. Some HSA custodians don’t support self-directed investing at all. But many will allow you a choice of mutual funds, ETFs, money markets funds, and other options.
Note: Self-directed investments can lose money, especially in the short term. HSA for America does not provide investment advice. The information in this article is for general informational purposes only and is not intended to constitute a recommendation to buy or sell any security.
For investment advice tailored to your specific situation, you should meet with a qualified investment professional.
5. Be Mindful of Fees
While HSAs offer many benefits, they can also come with various fees, such as account maintenance and investment fees.
Be aware of these costs and shop around for an HSA provider that offers a balance of low fees and good investment options.
According to a 2022 Morningstar report, account maintenance fees at some of the largest HSA custodians range from $0 to $45 per year.
Additionally, some custodians charge an investment fee for account owners who invest in mutual funds or a custodial fee for holding investments. The funds themselves also have underlying expenses, which average 0.31% for a typical investor.
6. Diversify Your Health Savings Account Assets
If you choose to invest your HSA money in asset classes other than cash, it’s a good idea to spread them across multiple asset classes.
That is, have some in cash in case you have a medical need within the next few years. Keeping about three years’ worth of insurance deductibles or health sharing member responsibility amounts in cash or money markets is a good place to start.
After that is accomplished, you can then take on more risk in hopes of better returns over time.
7. Delay HSA Distributions As Long As You Can
Hold on to your hats, because this one may seem a little counterintuitive:
Don’t reimburse yourself for healthcare expenses from your HSA right away.
Wait as long as you can. Here’s why:
Since the tax advantages of HSAs are so powerful – especially for those in higher tax brackets, sometimes it makes sense not to tap your HSA and reimburse yourself immediately for medical expenses, but to save your invoices and receipts, and use other money to pay those healthcare bills.
Meanwhile, you let your “strongest tax horse” run. You can let your HSA continue to accumulate tax-deferred as long as you like.
There’s no deadline to take that distribution. There’s no law that says your distribution from your HSA needs to be in the same year.
The longer you let it your HSA compound, the more money you’ll have available as a retirement asset down the road.
You can potentially delay taking an HSA distribution for years.
Since HSAs don’t have required minimum distributions like traditional IRAs and 401(k)s do, you can let your HSA continue to compound even past age 72.
As long as you’ve got the records to back it up in case of an audit, don’t be in a rush to take an HSA distribution if you can help it.
Note: HSA For America does not provide tax advice.
Example: if you paid $5,000 to your daughter’s orthodontist with other funds, you can later withdraw $5,000 from your HSA tax-free, and spend it on anything you like. For example, college tuition, an IRA, a down payment on a home or investment property.
This flexibility adds a strategic dimension to how you can use your HSA funds.
8. Take Advantage of New Health Savings Account Provisions
Previously, HSA account holders could not use their HSA to buy over-the-counter (OTC) medications not requiring a prescription.
But with the CARES Act of 2020, Congress significantly expanded the usability of HSAs.
Specifically, It included provisions that allow HSAs to cover over-the-counter (OTC) medications, as well as feminine hygiene products.
HSAs offer a unique combination of tax savings, investment growth, and healthcare funding.
By maximizing contributions, investing strategically, and understanding the nuances of HSAs, you can significantly enhance your financial health alongside your physical well-being.
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Questions?
Our expert Personal Benefits Managers can help you harness the power of HSAs and make them a cornerstone of your tax-saving and investment strategies.
With careful planning and informed decisions, your HSA can be a powerful tool in your financial arsenal.
Ready to get started? We’d love to hear from you and help you implement a plan to make the most of your HSA and other health plans.
Making an appointment for a consultation is easy and free! Just click here, and pick an appointment time.
Be sure to ask about the HSA MEC and health sharing options.
For Further Reading: Up Your HSA Game With These Three Investment Strategies | HSA Questions and Answers | 2024 HSA Contribution Limits | Can I Use HSA For Massage Therapy? (Yes. But Follow These Steps)
