7 More Things to Know About Health Savings Accounts
Friends – One of the first and most popular blog posts I wrote was way back in 2018 and it was titled 5 Things to Know About Health Savings Accounts. At the time HSAs were far less well known than they are today and the key points about their tax efficiency, your options to invest within them and ability to roll balances to the future as form of retirement savings were less well known. Today, HSAs are better understood, but not completely, and they are a part of nearly every conversation I have with new clients.
In this post, I wanted to share a few updates on HSAs and some of the finer, more strategic planning points that come up in my discussions with clients.
- Their Tax Benefits Remain Unbeatable – HSAs remain the only investment vehicle that is “triple tax advantaged” – meaning eligible contributions can be made on a pre-tax basis, grow tax free while invested and withdrawn tax free if used for qualified expenses – an incredible set of benefits for almost any investor.
- Limits Have Risen Significantly – The amount you can contribute to an HSA has gone up substantially over the past few years, in part due to high inflation. The IRS recently announced contribution limits for 2024 will be up to $4,150 for an individual or $8,300 for a family (up from $3,850 and $7,750 respectively in 2023). Investors age 55 and older can contribute an additional $1,000 per year. These amounts, steadily invested and compounded over many years could potentially provide a significant boost to your retirement savings.
Note: It is important to know if you qualify to contribute to an HSA in the first place before making contributions. - Qualifying Expenses Are Broad – The list of HSA qualified medical expenses (QME) is quite broad and virtually everyone or their dependents will experience healthcare-related costs at some point in their life. But still, some clients are hesitant about growing TOO large of an HSA balance over decades of saving and investing. The good news is there are significant costs you can reimburse from your HSA including Medicare expenses and some long-term care costs and insurance premiums.
- Non-Qualifying Distributions Have a Cost – HSA balances can also be withdrawn for non-qualified expenses, but there is a cost – they are subject to income taxes and a 20% penalty. For investors 65 or older the penalty is waived but taxes are still owed. At a minimum it is important to try and avoid non-qualified distributions prior to age 65.
- There is No Deadline on Reimbursement – The good news in regard to non-qualified distributions is they are fairly easy to avoid. That is because there is no deadline for reimbursing medical expenses, meaning any expense incurred after your HSA is established can be reimbursed at any time in the future – weeks, months, even years down the road. Because of this rule I always recommend clients save medical receipts somewhere easily accessible and pull them out to reimburse themselves as needed – either for retirement expenses or to use their HSA as a sort of tertiary emergency fund.
- You Can Also Contribute to a Limited Purpose FSA – Another option that even fewer people seem to know about is an account called a limited purpose FSA that more and more employers are offering in tandem with an HSA. Essentially, this is an account that can be contributed to IN ADDITION to an HSA and used for vision and dental expenses. These accounts come with their own qualifications, limits and abilities to roll money forward, which is beyond the scope of this note, but if your employer offers one it’s worth taking a close look to see if you might realize some additional tax savings by contributing.
- You Can Designate a Beneficiary – Another common question is: What happens to your HSA when you pass away? The short answer is that any amounts remaining in the HSA pass to your named beneficiary. How they are treated from there can vary. For a surviving spouse, the HSA continues on as normal. For a non-spouse beneficiary, the account ceases to be an HSA and the balance is taxed as income. Payments for medical expenses incurred by the deceased prior to their passing can be reimbursed to reduce the taxable amount within one year after death.
As always, if you have any questions or would like more information about health savings accounts and how they might work best within your overall financial plan, please don’t hesitate to reach out. I’m always happy to help.
Best,
CAMERON DIEHL, CFP®, CPWA®
Financial Advisor
