Health Savings Accounts May Provide Triple Tax Savings
by: Smith and Howard Wealth Management
A health savings account, commonly referred to as an HSA, is a tax-advantaged medical savings account. Tax deductible contributions are invested in underlying holdings that grow tax-free. Additionally, withdrawals from the account are non-taxable if used for qualifying medical expenses*. The characteristics of an HSA make it the only financial account that offers these triple tax savings.
*If withdrawals from the account are not used for qualified medical purposes, then there will be a 20% penalty along with income tax owed on the withdrawal.
First and foremost, who can contribute to an HSA? Individuals or families who are enrolled in a high-deductible health plan (HDHP) are eligible to open and contribute to an HSA. If you are enrolled in Medicare, you cannot contribute to an HSA; you can, however, make withdrawals from an existing HSA if it was opened before you enrolled in Medicare.
What is Considered a High Deductible Health Plan?
|Type of High Deductible Health Plan||Individual (single)||Family|
|Out of Pocket Maximums*
*Includes deductibles, copayments, and coinsurance
Contribution Limits to Health Savings Accounts (HSA)
|Type of HSA||Individual (single)||Family|
|Annual Contribution Limit||$3,000||$7,200|
|Catch up Contributions*
*For individuals who are 55 and over
An HSA can offer triple tax savings if implemented correctly.
To sum it up: tax-deductible contributions (no matter how high your income) made to the HSA grow tax-free and eventually come out of the account non-taxable to you when used for qualified medical expenses.
You Own Your HSA
When you open an HSA, you own the account. Because you own the account, it stays with you regardless of your employment status. For example, if you initially open your HSA while employed with a certain company and you leave that company, your HSA stays with you, not your former employer. It is also not tied to your health insurance provider. However, you must be enrolled in a high deductible health plan (HDHP) to contribute to the HSA. So, if you leave your employer where you had an HDHP with an HSA but do not enroll in your new employer’s HDHP, then you will not be able to contribute to your existing HSA. You can still take withdrawals from your existing HSA as long as they are used for qualified medical purposes.
Other Facts About the HSA
Funds inside an HSA are never lost if not used by year-end. If you have a balance at the end of a year, that balance will carry over into subsequent years, whether or not you made any withdrawals. This is a distinct difference between the HSA and the Flexible Savings Account, where funds not used by year-end are lost, or only a certain amount can be rolled over into the new year.
Typically, if HSA funds are used for non-qualified medical expenses, there will be a 20% penalty and income tax will be owed. However, if you have reached the age of 65, then non-qualified medical withdrawals will not incur a 20% penalty. Only income tax will be owed on those withdrawals. If you do have qualified medical expenses and you are over the age of 65, those withdrawals will be non-taxable. Because of this post-65 rule, an HSA account can be a great savings vehicle for high-income earners throughout their pre-65 years, giving them a tax deduction that they would not be able to obtain through more traditional routes like an IRA (where income limits affect eligibility to receive a tax deduction).
Is an HSA Right for You?
As discussed at the beginning of this article, you must be enrolled in an HDHP to qualify to open and contribute to an HSA. This means that before your insurance company pays for anything, you must reach your deductible of $1,400/$2,800 for individuals/families, respectively. Also, your out of pocket maximum expenses can reach $7,000/$14,000 for individuals/families, respectively. So, the HSA is a good fit for individuals or families who have the means to cover these expenses if they were to occur and reach these higher dollar amounts. They may also be a good fit for individuals and families who do not visit the doctor frequently as they can save on health insurance premiums with an HDHP that typically has lower premiums. It is important to note that anyone considering an HDHP needs to evaluate their own circumstances and consider if an HSA is right for them or their family.
Frequently Asked Questions
An HSA can be a vital savings account for those who are truly a good fit. HSAs offer tax deductions, tax-free growth and tax-free withdrawals for qualified expenses. They are also a great way to save for expensive, unexpected medical costs as the funds in the account are able to grow and compound. If you have any questions regarding an HSA, please contact me, Michael Mueller, CFP® or Jeff Brandon, CFP®.
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