What is an HSA?
An HSA is a savings account used for health care expenses that can be set up by an employer or individual. Money is contributed into the account through payroll deduction or a deposit. There is no requirement to withdraw funds. Any money leftover in the account at year-end is carried forward to the next year. HSAs are not “use it or lose it”, unlike FSA accounts, although the two are frequently confused.
Why open an HSA?
Employer-sponsored HSAs have triple tax savings: contributions are made pre-tax, no FICA tax on contributions, and no tax on distributions when used for qualified health care expenses. An individual HSA has double tax savings: contributions are deductible, and no tax on qualified distributions. An additional tax advantage is, if an individual chooses to invest their HSA contributions, the growth is tax-free.
You can reimburse yourself for any previous medical expenses that you incurred after opening an HSA account. Some people will open and fully fund an HSA account annually, investing the balance. They will pay medical expenses out of pocket, keeping track of their expenses. After allowing their account to grow tax-free for decades, they will reimburse themselves for those decades of medical expenses, and use the excess in the account as a “retirement medical savings account.” The compounding benefits of this strategy can be very substantial.
Who is eligible to open and contribute to an HSA?
To be eligible for an HSA you must be enrolled in a qualifying high-deductible health plan. An individual must be 18 years old and not a dependent to open an account. An individual enrolled in Medicare is not eligible.
For 2023, the contribution limit for an individual is $3,850 and $7,750 for a family. If an individual or married couple is age 55 or older, they are eligible for a “catch-up” contribution, which is an additional $1,000 per individual. The contribution deadline for 2023 is April 15, 2024. The contribution limit will increase annually based on inflation.
Distributions from an HSA used to pay for healthcare expenses are considered qualified, and therefore non-taxable. Unqualified withdrawals are subject to tax and a 20% penalty. However, if an individual is disabled or is 65+, they are not subject to the 20% tax penalty on unqualified withdrawals. The funds can be used to reimburse premiums for Medicare parts B, C, and D. An HSA can pay for most healthcare expenses except for paying health insurance premiums.
Please reach out to Bestgate Advisors if you have any questions
Links for qualified expenses: