- HSA stands for Health Savings Account, which is a special account used to save funds for qualified medical expenses using pre-tax dollars. These expenses can include health insurance deductibles, co-pays, prescriptions, doctors’ appointments, over-the-counter meds, and many others.
- Additionally, HSA funds not used for medical expenses can be used to supplement retirement savings after reaching age 65.
- Authorized banks or custodians house HSAs, where funds can be invested in cash, CDs, stocks, bonds, or managed funds. There is no borrowing or pledging allowed, and typically a certain cash threshold must be met before excess funds can be invested.
Benefits of HSAs
- In a world of rising costs and healthcare expenses (both now and in retirement) HSAs allow those eligible to save in a tax-efficient manner.
- HSA Funds are “triple tax-advantaged”:
- Contributions go in pre-tax.
- Earnings and interest are tax-free if used for qualified expenses and tax-deferred if used to supplement retirement.
- Distributions are tax-free for qualified expenses and taxed as income if used for retirement.
- Unused HSA funds accumulate for your lifetime and pass to your heirs.
- HSA owners have complete ownership of their accounts and they are portable from bank to bank.
Contributions to HSAs
- Those eligible to open and fund an HSA must be a participant in a high deductible health care plan (HDHP) as defined by the IRS and have no other medical coverage, including Medicare. You must also not be named a dependent on someone else’s tax return.
- For 2022 a single HDHP participant can contribute up to $3,650 while a family can contribute up to $7,300.
- Contribution limits are set to increase to $3,850 and $7,750 respectively in 2023.
- HSA owners age 55 or older can contribute an additional “Catch-up” amount of $1,000 annually.
- HSAs allow for a once-per-lifetime rollover from an IRA or Roth to HSA. These contributions are not deductible and are subject to contribution limits.
HSA’s can be a powerful healthcare, retirement and tax planning tool with multiple potential advantages. As each person’s eligibility, goals and financial situation may vary, it is best to consult a financial advisor and tax professional to see if an HSA makes sense for you.
Original content provided by Aaron R. Evans, CFA, CFP® a Senior Advisor at Strategic Financial Services.
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