6 Benefits of Health Savings Accounts and 1 Superpower:
Fall is usually the time of year for millions of Americans to take out cable-knit sweaters, enjoy pumpkin-spiced lattes, and set up their health insurance plans for 2023.
As Financial Planners, we aim to minimize the surprises that might throw people off track financially. One of the biggest surprises people don’t consider is the cost and extent of healthcare they may experience as they age.
It’s one of those things that when you realize you need it, it’s probably too late. You may have to dip into personal funds or need to request children for support which might stretch their finances thin or slow down their pace of achieving their goals.
If you have a high-deductible health insurance plan, then you may be able to opt into contributing to a Health Savings Account (HSA) while you’re employed. For 2023, the maximum an individual can contribute is $3,850; for a family, it is $7,750, plus an additional $1,000 if you are 55 or older.
HSAs are often touted as being a hidden savings jewel not mined enough. Most people use them mainly for medical expenses, but the account has multiple layers of benefits.
Let’s learn about the 6 benefits of HSAs and the 1 hidden superpower frequently missed.
Benefit 1 – It can be used to pay deductibles
We’re an overconfident species. A recent study by the USDA and the University of Central Arkansas showed that over 85% of participants inaccurately rated their diet as healthier than it really was.
Most people opt into high-deductible plans because they’re confident about their health, feel they have a low need for costly healthcare, and prefer paying lower premiums. However, when they have unexpected deductibles to pay, thousands of dollars can take a big bite out of their savings or emergency fund.
The pre-tax dollars in the HSA can be used to pay out-of-pocket health expenses.
Example: Ravi slipped and broke his arm while painting his home. The family deductible on his employer’s health insurance plan is $3,500. Ravi must dip into his post-tax savings account to pay the deductible. At a 32% tax bracket, the pre-tax amount would be $4,620. If Ravi used an HSA to pay the deductible, he would have tax savings of $1,120.
Benefit 2 – It’s an investment account
Any unused contributions within the account are invested, so you can benefit from compounding returns for years.
Benefit 3 – It’s triple tax-free
The contributions to HSA accounts are not taxed, investments grow tax-free, and there is no tax on withdrawals used for eligible health expenses. These tax benefits are better than those offered for IRAs and 401(k) plans.
Benefit 4 – Healthcare expenses can be paid from the account years after they occur
The HSA can frequently cover more expenses than people think, including aspirin, band-aids, co-pays, and even Medicare premiums. You can check the IRS website to review a complete list of eligible expenses. So long as you have the receipts, you can claim qualified expenses years down the road.
Benefit 5 – It can be an additional retirement account
If you use the funds from your HSA for an ineligible expense after age 65, you must include the amount in your taxable income that year on IRS form 8889. After age 65, there will not be a penalty if the account is used for non-medical expenses. There will be ordinary income taxes to pay, similar to an IRA.
Benefit 6 – It’s portable
Even if your HSA started as an employer-provided benefit, it belongs to you, just like an IRA. If you move or are unsatisfied with the fees offered, you can move the account elsewhere.
Benefit 7 – There is a catch-up provision
If you’re over 55, there is a catch-up provision of $1,000. If both spouses are over 55, this would mean an additional $2,000 in HSA contributions.
There is a little technicality to remember here. If you have the HSA family plan and are over the age of 55, you would be able to contribute $8,300 into the account ($7,300+$1,000). Your spouse, also over 55, would need to open a separate HSA and contribute $1,000. An additional step administratively but not a serious issue, if each other is named as the beneficiary, you can spend the HSA on each other and stay married.
The HSA Superpower
A unique but common situation for many parents is that as their children graduate college, they come back home and look for jobs, and they decide to stay on their parent’s health insurance because it’s more convenient and cheaper. Children can remain on their parent’s plan until age 25. Children are a no longer tax dependent at this age, so they can open their own HSA.
Example: Greg Smith has family health insurance through his employer and makes the maximum contribution of $7,300 to his HSA for 2022. His daughter Lara, 23, can also put $7,300 into her own HSA account. She’s not earning any money now as she’s pursuing a master’s degree, so Greg is gifting her the money. She might get a paid summer internship, at which point the HSA contribution would be tax-deductible to her.
Two Important Things to Note about HSAs:
1) Check the beneficiaries on the account.
As with all accounts, we recommend our clients review the beneficiaries periodically. We don’t like saying the “D” word, but we often have to think about death to leave our loved ones in the best position. When you die, what happens to your HSA is dependent on who your beneficiary is. If your spouse is the designated beneficiary on your HSA, then the HSA will move to your spouse after your death. Suppose you have selected your estate or another person who is not your spouse as a beneficiary. In that case, the account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year you die.
2) The record-keeping is on you.
Example: Dan has an operation that costs $5,000. He forgot he had funds in his HSA and paid from his emergency fund. Months later, using the hospital invoice, he could take a $5,000 distribution from his HSA and replenish his emergency fund.
Conclusion
HSAs are savings vehicles that shouldn’t be ignored. However, knowing whether to choose between a high-deductible plan with an HSA or one without will depend on your individual circumstances. Despite health insurance premiums typically being lower for high-deductible plans, you may have a medical situation like a planned surgery or a pregnancy that could warrant you opting for a low-deductible plan that year. As you decide, consider all the benefits of the HSA and evaluate if it is the right option for you.
Adviso Wealth is dedicated to working with people just like you. We want to give you the clarity and confidence you need to achieve your personal and financial goals.
To learn more, visit advisowealth.com or email sweta@demo.advisowealth.com