Health Savings Accounts (HSAs) are powerful health insurance and retirement planning tools.
In this article, we will explore the history of HSA accounts, their advantages, funding mechanism, and eligibility considerations.
A Brief History of HSAs
The HSA was created in 2003 as a way to help cover medical expenses for individuals in High-Deductible Health Insurance (HDHI) plans. An HDHI plan is defined as any health insurance plan with a deductible of at least $1,400 (2022) for an individual or $2,800 (2022) for a family.
These plans generally have lower premiums and require the insured to pay more of their own expenses (via the deductible) before the insurance company begins to pay. For many healthy individuals, the lower premium is appealing, even if they are required to bear a greater share of the expense if they do have medical issues.
HSAs allow investors to save tax-free dollars for the exclusive use to pay for qualified medical expenses.
Benefits of Funding an HSA
Now that we have established what HSAs are, one major question is, “Why contribute to an HSA?”
The simple answer comes down to tax savings.
An HSA allows you to contribute pre-tax funds, as you would similar to a traditional pre-tax retirement account and use those funds to pay for qualified medical expenses. You do not pay any tax on the funds when they are withdrawn. An HSA combines the two best features of a traditional Individual Retirement Account (IRA) and a Roth IRA since you do not need to pay taxes on the funds that go in or come out of an HSA account.
The caveat, is that the funds must be used for qualified medical expenses only, which fortunately, cover a wide array ranging from co-pays for doctor visits, deductibles for medical procedures, and prescription drugs, to less obvious items such as acupuncture and midwife services.
Using an HSA, especially when incurring a substantial medical expense, such as surgery or the birth of a child, can easily result in hundreds or even thousands of dollars in tax savings.
A Deeper Dive
Three key features of HSAs include the following:
- The funds in an HSA account are not subject to surrender and stay with you regardless of whether or not they are used in a given year.
- Some HSA providers allow the investing of funds once the account has reached a certain asset level.
- Once you reach age 65, you can withdraw HSA funds for non-medical expenses but will need to pay income tax on the funds, just as you would with a traditional IRA. You may withdraw HSA funds for non-medical expenses prior to age 65 as well, but they will be subject to both income tax and a 20% penalty.
Given that an HSA can be invested in the markets and used like a traditional IRA, (without the Required Minimum Distributions and the reward of being tax-free if the funds are used for qualified medical expenses), it provides a compelling retirement savings vehicle, as well as a tool for paying for medical expenses.
Eligibility, Rollovers, and Funding Limits
Most people enrolled in an HDHI plan can fund an HSA.
The enrollee owns all assets in the HSA, and should you switch health insurance providers or are no longer in an HDHI plan, you will continue to own and have the ability to fund your account if you return to an HDHI plan in the future.
For 2022, individuals can fund up to $3,650 for insurance coverage (2022) and $7,300 for family coverage (2022). Once you reach age 55, you may fund an additional $1,000 catch-up contribution annually until you reach age 65 or enroll in Medicare. These limits are reduced by any amounts that your employer contributes to your HSA. One limitation is that an HSA cannot be rolled over into an IRA, but a once-in-a-lifetime rollover of up to the annual limit is allowed from an IRA into an HSA.
Most Americans lose the ability to fund an HSA once they reach age 65 and enroll in Medicare, which is not a HDHI plan.
HSAs are offered through independent providers, including many banks and credit unions.
While HSAs are not right for everyone at every stage of life, they are a powerful new tool and pose an exciting opportunity to both save for retirement and pay for qualified health expenses.
In short, they are worth considering if you are in a high-deductible health insurance plan.
Roehl & Yi Investment Advisors can assist you in your financial decision making and help you determine which path may best meet your needs.
Written by: SARAH MELLGREN, JD, CFP®, Roehl & Yi