October 3, 2023
Categories: Financial Planning, Financial Security, Financial Wellness, Future Planning, HSAs
By Dawn Kellogg
We all incur medical expenses. It’s a fact of life. It could be something as simple as bandages from a pharmacy, or something more complex like a surgery. Most of us pay for these costs through our medical insurance, or out of pocket. But a Health Savings Account (HSA) offers a way to save for these types of expenses and make purchases using a tax-free account.
HSAs were created as a way for people with high deductible health plans (HDHPs) to be able to save money pre-tax to pay for medical expenses. As long as the funds are used for medical expenses, withdrawals are tax-free. (Note: If you use the funds for anything other than qualified medical expenses, and you are under the age of 65, you will pay a 20% penalty and be liable for income tax on those funds.)
There are a few requirements to be eligible for an HSA:
- You must be covered under a qualified high-deductible health plan (HDHP)
- You cannot be covered under any health plan that is not an HDHP
- You cannot be already covered by a general purpose Flexible Spending Account (FSA)
- You cannot be enrolled in Medicare
- You cannot be claimed as a dependent on another person’s tax return
With an HSA, the funds you contribute into the account each pay period go in pre-tax. In some cases, employers will match or contribute as well. Think about it: it is in the interest of your employer to help you stay fit and healthy, so they want to invest in you! Even if you choose to deposit additional funds not directly from your payroll, those funds are tax deductible as well. There are limits, however, to how much you can contribute each tax year. For 2023, the limit is $3,850 for single-insured and $7,750 for families. If you are over 55, each of those limits increases by $1,000, giving you 10 years before you reach the age of 65 to inject some more pre-tax cash.
You can contribute up to the max limit regardless of your income, and your entire contribution is tax deductible. You can even contribute in years when you have no income, or if you are self-employed, as long as your health plan qualifies.
Unlike other accounts, such as Flexible Spending Accounts (FSA) where you lose funds if you don’t use them within the tax year, you will not lose any funds that you don’t use in your HSA – they simply roll over into the next year, or even onto your next job. It’s your money. With an FSA, you cannot take that money with you if you leave your job. As an HSA is a savings account, it will accrue interest and the growth on your HSA funds is tax-free.
But did you know that HSAs have another purpose? They can also be used to build a nest egg for your retirement. HSA contributions are tax-deductible until you sign up for Medicare at the age of 65. If you are 65 or above, you can withdraw the funds for any reason without penalty fees, however, you will be subject to income tax as you would with a traditional IRA. Unlike other retirement investments, the IRS doesn’t require you to take distributions from your HSA before or after retirement – there is no requirement to begin withdrawing money at age 72. So, you can keep the money invested until you need it.
You can continue to withdraw funds for medical expenses tax-free after the age of 65, and even use the funds for in-home nursing care, retirement community fees, long term care services, as well as for modifications to your home to accommodate aging such as handrails and ramps.
As we approach open enrollment season, if you are currently enrolled, or planning to enroll in an HDHP, consider opening an HSA. It offers excellent tax advantages and offers you the flexibility to use your pre-tax contributions for medical expenses and beyond. By maximizing your contributions, investing them, and maintaining the balance until you retire, your HSA can be an addition to your retirement portfolio.
The Summit Federal Credit Union offers HSAs at competitive rates which are now tiered. Click here for more information and answers to your most-asked HSA questions.
Dawn Kellogg is the Public Relations and Community Engagement Specialist for The Summit Federal Credit Union.