Health insurance options are confusing at best, and often employees are overwhelmed by what to select when they start a job or during open enrollment. While a high-deductible health plan, or HDHP, can sound a little scary, it just means that you pay a lower premium per month but a higher annual deductible for medical care. How high? In 2022, the deductible is at least $2,800 for a family and $1,400 if you’re single.
5 Unexpected Insights from Your Tax Return
One advantage to a high-deductible health plan is that it comes with the option to save money in an HSA. An HSA, or health savings account, is a triple tax-advantaged account where you can contribute money pre-tax, allow it to grow tax-free, and then take it out without paying any taxes on it as long as you’re using it for a qualified medical expense.
Don’t Confuse HSA with FSA
While HSA and FSA may sound similar, they’re very different accounts with different rules. The FSA, or flexible spending account, can be used for any type of health insurance plan, whereas an HSA is only used with a high-deductible plan. While both the HSA and FSA account may be offered through your employer, the HSA can go with you if you switch employers or retire.
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Don’t Move to Another State Just to Reduce Your Taxes
Flexible spending accounts have limits each year on how much you can roll over to the following year, and as such are intended to be used for medical expenses within the year. For your health savings account, you can choose not to withdraw any amount in that year and all the money will roll into the following year and beyond.
Save Those Receipts
While you can roll money over from year to year in your HSA, you’ll need to keep track of each medical expense to later withdraw the money as a qualified expense.
Save those receipts! The IRS determines what qualifies as a qualified medical expense, and if your withdrawal amount doesn’t qualify, you’ll be hit with a tax penalty. Keep track of your medical bills, receipts for expenses and other documents so that you can withdraw the exact amount that you spent in order to avoid the penalty and take the money out tax-free. Another thing to keep in mind is that those same expenses you wish to take out from your HSA can’t be taken as an itemized deduction on your taxes that year.
How steep are the tax penalties? There’s a 20% tax on any withdrawal amount that is not used toward a qualified medical expense. There is some good news – the IRS has an exception for no additional tax on distributions from an HSA after you become disabled, turn 65, or if you die.
Using Your HSA as an Investment Strategy
One major advantage of the health savings account is that you’re putting money in pre-tax, allowing it to grow tax tree, and then withdrawing it tax-free as long as you have a qualifying medical expense. These tax savings, combined with the investment potential of the account, can add up over the years. One investment strategy for your HSA is to max out the amount you can contribute each year. In 2022, the current limits are $3,650 for self-coverage and $7,300 if you have family coverage.
If your employer matches contributions, take advantage of the match. You do need to account for the employer match, in that it does reduce the amount that you’re able to contribute. Take the amount your employer contributes to your HSA and subtract it from your maximum contribution amount to determine how much you can contribute each year.
Keep in mind that HSAs are not subject to required minimum distributions like an IRA or 401(k), so there is not a set amount that you need to take out each year once you hit 72.
It’s always best to talk through your investment strategies with a financial adviser who can look at your entire financial situation and help you to determine the best course of action for your specific needs.
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Disclaimer
Financial planning and Investment advisory services offered through Diversified, LLC. Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC Headquartered at 80 State Street, Albany, NY 12207. Purshe Kaplan Sterling Investments and Diversified, LLC are not affiliated companies.
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Diversified, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsem*nt of the firm by the SEC. Diversified only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. Investments in securities involve risk, including the possible loss of principal. The information on this website is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
How Your Retirement Savings and Income Are Taxed
Disclaimer
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
FAQs
Contribute enough to cover your expected medical expenses—and then some. Aim to build the account to completely cover one or more years of maximum out-of-pocket costs. Only draw on the account for large or unusual medical expenses, not the routine ones.
How to make the most out of your HSA in 2024? ›
The best way to maximize your HSA in the new year is to contribute the maximum amount you're allowed and then leave that money alone. HSA investments get to grow tax-free, so if you leave your balance untouched, you can amass a lot of money to spend on healthcare expenses in retirement.
What is the main benefit of a health savings account group of answer choices? ›
An HSA covers a wide range of routine medical costs, including: Qualified out-of-pocket medical expenses you incur before you've met your HDHP deductible. Medical, dental or vision coinsurance and copayments. Prescription drugs and over-the-counter medications.
What is the HSA reimbursem*nt loophole? ›
Keep in mind that you can reimburse yourself for any expense at any point, as long as it was incurred after your HSA was established. So if you had an expense that you paid out-of-pocket last year after your HSA was established, but want to reimburse yourself for it this year, you can do so without penalty.
What percentage should I put in my HSA? ›
The short answer: As much as you're able to (within IRS contribution limits), if that's financially viable. If you're covered by an HSA-eligible health plan (or high-deductible health plan), the IRS allows you to put as much as $4,150 per year (in 2024) into your health savings account (HSA).
Should I max out my HSA first? ›
If you're able to make the maximum contribution each year, then it's suggested that you do so. Some years you may need to use more of your HSA contributions than other years. Just remember, there's no yearly minimum you have to spend from your HSA and your entire HSA automatically rolls over each year.
What is the 12 month rule for HSA? ›
The last-month rule comes with an important catch, though. You must stay enrolled in an HSA-eligible health plan for a one-year "testing period" running from December 1 of the year you contribute to December 31 of the next year.
Should I max out my HSA every year? ›
Contribute as much as you can afford to an HSA. The tax advantages of a health savings account (HSA) are unique, even better than any IRA or 401(k) plan. As a result, an HSA is like a “super IRA,” and you should contribute as much as you can afford, subject to IRS limits on HSA contributions.
Can you use HSA for dental? ›
HSAs can help pay for a variety of dental services and orthodontic procedures. Here are some of the specific dental procedures your HSA can help cover: Crowns (when non-cosmetic, and may need a letter of medical necessity (LMN)) Sealants (if used for the prevention or treatment of a dental disease)
What is the downside of an HSA? ›
The main downside of an HSA is that you must have a high-deductible health insurance plan to get one.
6 Benefits of choosing an HSA plan
- Save on taxes. Your HSA contributions go into your account before taxes. ...
- Save on your medical expenses. Use your HSA funds to pay coinsurance, copays and your deductible (all tax-free). ...
- Your money works harder in an HSA. ...
- You're in control. ...
- An HSA is an investment. ...
- Save for retirement.
A Health Savings Account (HSA) is a type of personal savings account you can set up to pay certain health care costs. An HSA allows you to put money away and withdraw it tax free, as long as you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more.
How does IRS know what you spend HSA on? ›
Verification of expenses is not required for HSAs. However, total withdrawals from your HSA are reported to the IRS on Form 1099-SA. You are responsible for reporting qualified and non-qualified withdrawals when completing your taxes.
What happens to HSA money if you don't spend it? ›
Unlike many flexible spending accounts (FSAs) and health reimbursem*nt arrangements (HRAs), unused HSA funds automatically carry over to the following year. Even if your employer provided the account and made contributions, the account belongs to you — so any remaining funds are carried over every year.
What happens to money in HSA if not used? ›
Unlike many other health plans, the balance in your HSA account carries over indefinitely. This means that any extra money you have at the end of the year does not disappear or reset. Instead, it remains in your account and continues to grow over time.
How aggressively should I invest my HSA? ›
Try to invest as much of your HSA money as possible while ensuring that you keep enough cash to cover your qualified medical expenses. Consider where your other retirement plans are invested as well to make sure that your HSA investments provide diversification. Avoid taking out funds from your HSA as much as possible.
How to use HSA to build wealth? ›
Think of your HSA as a home for your medical money. Just like a brokerage account or an IRA, you'll need to put money into the account before you buy investments. Then, after you fund the account, you can start investing.
What is 1 potential downside of investing in an HSA? ›
The main downside of an HSA is that you must have a high-deductible health insurance plan to get one.
What is the shoebox strategy for HSA? ›
For account holders who wish to use their HSA account in this manner, the best practice — sometimes called the "shoebox strategy" — is to keep ongoing records and receipts for every medical expense incurred over the years, including little things like over-the-counter medicines, menstrual products, sunscreen, and other ...
