Health Savings Account (HSA) and Your Triple Tax Benefit
What is an HSA?
A Health Savings Account (HSA) is a pretax savings account that allows participants of high-deductible health plans (HDHP) to cover out-of-pocket health care costs. To be considered HDHP, you must be covered the first day of the month and the minimum annual deductible for individual and family coverage is $1,400 and $2,800, respectively.
Aside from having HDHP coverage, the following conditions must be met in order to qualify for an HSA account:
- You are not enrolled in Medicare. Note: A person may elect to decline Medicare when he or she turns 65; however, this may not be advisable and personalized advice should be sought from your advisor before making this decision.
- You cannot be claimed as a dependent on anyone else’s tax returns for the prior year.
- You have no other health coverage plans.
Qualifying individuals may contribute up to $3,600 in their HSA for 2021 and $7,200 for families.
HSA Uses
An HSA allows the account owner to pay or reimburse certain out-of-pocket medical expenses for yourself and your family. Generally, HSAs can be used to cover eyeglasses, X-rays, doctor’s visits, dental treatment, therapy, medical expenses related to qualified long-term care services (including a portion of long-term care insurance premiums), and a host of other qualifying medical expenses (please visit the IRS website to learn what else is includible).
HSA Benefits
HSAs can be used as an investment vehicle to grow health savings values over time. By using health savings as an investment tool, you are eligible for a rare triple tax benefit:
- Your contributions to an HSA are tax-deductible
- Growth of your HSA assets are federally tax-free
- Withdrawals from your HSA are tax-free if used for qualifying medical expenses. Note, you will pay income taxes on withdrawals used for non-qualified medical expenses or any other expenses.
Unlike Flexible Spending Accounts (FSAs), balances in HSAs can be carried into future years with no obligation to use balances within any given year. You, your employer, or anyone else can make contributions to your HSA up to the annual limit. Should you change jobs, HSAs are portable and can be moved with you (they are not owned by your employer). You do not have to take required distributions from HSAs when you turn 70.5 as you do for most other qualified savings accounts. Finally, should you pass away with an HSA account and your spouse is the beneficiary, the HSA will be treated as his/her HSA after death.
In Summary
An HSA account is a great way to save and grow health savings assets over time and take advantage of a triple tax benefit in doing so. HSA rules are flexible in contrast to many other types of health savings strategies and should be something to consider if you qualify for HSAs. As always, please consult your advisor at Heck Capital for questions on whether or not an HSA is right for your situation.
Authored by Michael Bogard, CFA on March 28, 2019. Edited on May 6, 2021.
About the Author: Michael Bogard, CFA is a Business Development / Client Relationships Senior Associate at Heck Capital Advisors. Michael earned the right to use the Chartered Financial Analyst® (CFA®) designation after completing the program in 2018, fulfilling the work experience requirements, and gaining acceptance as a member of the CFA Institute. The Chartered Financial Analyst® (CFA®) charter gives a strong understanding of advanced investment analysis and real-world portfolio management skills. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Heck Capital is an independent, Registered Investment Advisory Firm providing comprehensive investment management, personalized advice, and strategic financial guidance since the 1950s. We serve goal-driven individuals, families, established institutions, non-profit organizations, and foundations/endowments; striving to help our clients achieve their investment objectives, helping to simplify their financial lives, with the goal to create lasting legacies.