The Magic of an HSA
If you're young and healthy, this is probably the best healthcare plan for you
OK, OK so I know this one is late and I promised it would come out on Sunday. But it has been a busy month and there are a lot of exciting things going on including another platform that I’m writing for. More on that in November but for now enjoy this article, HSA are really a cheat code for the young and healthy.
Did you know there is a way to pay for nearly all of your medical needs, tax-free? If not, let’s dive into Health Savings Accounts. Also known as HSAs, Health Savings Accounts are used in concert with a High-Deductible Health Plan (HDHP). These plans allow you to put aside money from your paycheck into your HSA while enjoying triple-tax benefits (within limits) as long as the funds are used for qualified medical expenses.
How to Contribute to an HSA
You must have a High-Deductible Health Plan ($1,400 for an individual and $2,800 for a family) to open an HSA. Most likely this plan will be provided by your employer.
Plans through an employer may allow account fees to be waived from your HSA account
Some employers contribute to HSA plans for their employees as well
Contributions come from your paycheck into your HSA
You may contribute to your HSA up until the tax deadline
For example, if tax day is April 18th, 2022 for tax year 2021, I can contribute up until my contribution limit on or before that date. Any contributions after that date fall in tax year 2022.
Tax Free Contribution Limits
$3,650 for individuals younger than 55 | $4,650 for those older than 55
$7,300 for family younger than 55 | $8,300 for those older than 55
Benefits of an HSA
Triple-tax benefit
Money contributed to an HSA is tax-free up to $3,650 for individuals and $7,300 for families (2022)1
Funds from your HSA invested into financial assets grow tax-free, and roll over year to year
Distributions (withdrawals) from the HSA are tax-free as long as the funds are spent on qualified medical expenses
Examples of Qualified Medical Expenses (there are many more)
Disposable Face Masks, Prescriptions, Doctor Fees, Braces, Insoles, Humidifier, Chest Rub, Crutches, Dental Cleanings, Vitamins, CT Scan, Medicated Body or Face Wash, Medical Testing Devices, MRI, Condoms, OB/GYN , Mammogram, Treadmill, Morning After Pill, Decongestant.
How to Use HSA Funds
Generally, your HSA provider will issue a card for you to use on qualified medical expenses.
How to File Your Taxes if you have an HSA
You will file a IRS Form 1099-SA where you list your total HSA distributions. You may also need to file Form 5498-SA, which reports annual contributions to your HSA that you used to pay for medical expenses.
HSA Cash Balance vs. Investment Balance
HSA cash balance is the amount of uninvested cash in the account. The investment balance are funds invested in securities like stocks, bonds, etc.
How is an HSA useful in retirement planning?
Tax-free distributions to pay for medical expenses. Unlike 401K plans which tax the account holder for their distribution amount each year, HSA distributions are tax-free if spent on qualified medical expenses. A well-funded HSA in retirement means large savings if tax-free HSA distributions are used instead of 401K or even IRA funds, which are pre-taxed.
Investing your HSA can lead to significant returns. A family investing the max amount in their HSA over a 30-year period with a 7% return will have $1,000,000 in HSA dollars having invested in $322,000 in cash.
Once in retirement, you can utilize your HSA account to pay for expenses not covered by Medicare, cover Medicare premiums, pay for long-term care, pay for other non-medical expenses (however you will be required to pay state and federal taxes on these distributions)
How to Open an HSA
HSA are relatively easy to create:
First and foremost, you must select a High Deductible Health Plan (HSA) to be eligible for an HSA.
If you select a HDHP through your employer or opt for private insurance not through an employer, there may be a specific HSA provider that you will have to create an account with. You will want to follow the steps provided by your employer.
If you are not required to choose a specific HSA provider through your HDHP, you will need to create an HSA account through a provider. Many institutions provide HSA services, here are a select few.
It is important to understand the fees associated with your HSA. Here are a list of the fees to watch out for:
HSA Service Fee
The amount charged per month to maintain your HSA. This may be covered by your employer.
HSA Check Distribution Fee
When you use a check to make qualified medical expenses, you can avoid this by using online transfers
HSA Closure Fee
If you lose your HDHP coverage, this is a fee for closing the account.
Debit Card Issuance Fee
Charged for debit cards sent to the HSA account holder and dependents.
HSA Returned Item Fee
Charged if you don’t have enough money in your account.
Minimum Account Balance
Be aware if your HSA provider requires a minimum amount in your account
Account Transfer Fee
Charged if you transfer your HSA to another account or provider.
Some HSAs also offer an interest rate that can help grow the money available.
Once you complete your HSA setup, you want to allocate a certain amount of each paycheck to the HSA. This makes sure the money flows into the account tax-free.
Many payroll systems have a section to allocate to your HSA account and even a tool to calculate how much of each paycheck will be deducted to go to your HSA.
Most likely, you will receive a debit card to use when making qualified medical expense payments. Be sure to keep receipts and records of the expenses charged to the card.
How to roll over an HSA to another provider if your current provider charges too much for fees
Many HSA providers charge an account transfer fee. You will want to be aware of the amount when transferring.
Direct transfer from HSA to HSA
Direct transfer between HSAs is not considered a rollover if the trustee on both accounts are the same
Set up a new HSA with a new institution, make sure you are the trustee on the old and new account.
Usually the old HSA provider will have a process for HSA transfer, follow these steps
Conclusion
HSA are a very useful tax-free way to save money for medical expenses. Not only does the account prove useful through your entire working career, but also in retirement as well. Contributing the maximum to this account early on in your career will almost certainly payoff (literally) in the future.
Disclaimer: This is not professional and/or financial advice. This content is for informational purposes only. Before making any financial decisions you should do your own research, evaluate your financial situation, and/or consult a financial professional.
$1,000 catchup contribution allowed for those 55 and older.