Health Savings Accounts provide numerous current and future benefits
My Health Savings Account (HSA) is one of my favorite accounts.
I used my HSA account sparingly during the initial years I owned the account. Early on, my stance was to not use it for “normal” medical expenses like doctor visits, medications and costs that were “manageable” – did not come with sticker shock. Thankfully, my family and I have been relatively healthy. This allowed contributions to compound without interruption. The last few years, however, has led to near regular use of the HSA funds.
I typically pay for qualified health services with my credit card (gain more points!) and reimburse myself by submitting the expense through the HSA bank. Usually, HSA banks also will provide a debit card, or even the option to set up an online bill pay similar to a regular checking account. Multiple payment options is one of the benefits.
Key highlights of HSAs:
no deadlines to use funds
variety of eligible expenses
triple tax benefits
The HSA account belongs to the owner. When switching jobs, the account and the funds remain yours. The funds do not have to be dispersed or forfeited. If a new employer uses a different HSA bank, the old account can be transferred.
The funds remain in the account until needed. There are no annual deadlines to use them (as in the case of Flexible Spending Accounts). They can remain untouched for years if they are not needed.
HSA accounts may have investment options. Meaning, cash can be moved to a brokerage account tied to the HSA. The brokerage account offers the traditional investment choices - stocks, bonds, ETFs. Here at Jackson Creek, we use Lively, which has an option to transfer money to a self-directed Schwab account. The amount of cash that must be maintained in the HSA bank before transferring differs, but it is wise to keep some cash available. This minimizes the need to sell securities to cover expenses. If you are fortunate enough to not need your HSA funds, they can compound for future use.
Many types of expenses are eligible for HSA use. Doctor visits, medical procedures, and prescriptions meet the criteria. HSAs are great for unexpected (un-budgeted) medical liabilities. There are exclusions so be sure to check with your service provider and HSA bank.
HSAs have triple tax benefits. Contributions are tax-deductible, earnings and growth are tax-free, and there is no tax liability when used for qualified medical expenses. Contributions can be made up to the tax-filing deadline for the previous year.
To contribute to an HSA, you (or a spouse) must be covered by a high-deductible insurance plan. Contribution limits for 2023 are $3,850 (self-only coverage) and $7,750 (family coverage). There is a $1,000 catch-up limit for those 55 and older. Check to see if your employer will make contributions on your behalf.
As with most investment and retirement options, there are important considerations and/or exceptions if circumstances change during the year. Consult with your tax and financial advisors to see how to best utilize an HSA (if available).
An HSA account can be transferred to a spouse upon death without any taxes and penalties. The surviving spouse can use it just as the initial owner did. HSA accounts passed to children lose the benefits. The children will receive the account balance and get taxed on it.
HSA accounts can be a terrific addition to traditional retirement and savings plans. It affords flexibility, growth, tax benefits, and financial support in normal and unexpected times.
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