A Health Savings Account (“HSA”) is often the most overlooked retirement account. Why consider this a “retirement account?” Because it’s not a use-it-or-lose-it proposition. On top of that, you can invest it for the future vs. spend today. Let’s take a look at the primary benefits of an HSA.
What’s a Triple Tax Benefit?
Account owners receive 1) a tax deduction in the year of contribution, 2) tax-deferred growth, and 3) tax-free distributions. Let’s dive in!
1. First off, contributions to an HSA are tax-deductible.
- 2023 limits – $3,850 for individuals / $7,750 for families
- 2024 limits – $4,150 for individuals / $8,300 for families
Nuances to be mindful of:
- Employer contributions are included in the IRS max (unlike a 401(k)).
- There’s a $1,000 catch-up contribution for individuals over the age of 55.
- You have up until April 15th, or when you file your prior year’s tax return to contribute, whichever is sooner.
2. Secondly, you can invest the cash in your HSA, and any growth/income earned on the funds is tax-deferred.
3. Last but not least, withdrawals from the HSA at any point are tax-free if they are used to pay/reimburse the account owner for eligible medical expenses.
HSA Considerations
Here are the top four most frequently overlooked items to consider when maintaining an HSA.
1. Start here: You must have a High-Deductible Health Plan (HDHP).
- The IRS defines this annually. For 2024, a HDHP must have a minimum deductible of $1,600 / $3,200 for self-only / family coverage. On top of that, your plan must have a maximum out-of-pocket limit of $8,050 / $16,100 for self-only / family coverage.
2. This is our favorite: Expenses must meet the IRS’s definition of eligible medical expenses to qualify for tax-free withdrawals.
- This is on you to self-report!
- Save receipts for more material expenses; you can reimburse yourself in the future for costs incurred today if you maintain the supporting documentation.
- HSAs can pay for Medicare expenses, including Medicare Part B, Part D, and Medicare Advantage plan premiums, deductibles, copays, and coinsurance.
- **HSA funds CANNOT be used to pay for Medigap premiums!
3. Don’t forget: Enrolling in Medicare ends HSA eligibility.
- Applying for Social Security benefits after age 65 corresponds to automatic enrollment in Medicare!
4. Lastly, be sure to name a beneficiary and understand the implications.
- If the beneficiary is a spouse, the surviving spouse becomes the HSA account holder, and the transfer of ownership is not taxable.
- If the beneficiary is a non-spouse, then the beneficiary’s gross income includes the account’s fair market value on the date of death – this is super important (and a huge bummer)!
Long-Term Benefits
In conclusion, it’s easy to understand that HSAs have both practical and psychological benefits for retirees.
- Practically, an HSA increases retirement savings by facilitating a tax-efficient payment method for medical expenses.
- Psychologically, an HSA allows you to mentally account for healthcare costs by segregating the funds.
Is it worth opting into a HDHP and a corresponding HSA if the medical benefits and investment options are better for you and your family? Great question! Connect with us to discuss this further with you.
Please consult with your financial advisor and/or tax professional to determine the suitability of these strategies. All views, expressions, and opinions in this communication are subject to change. This communication is not an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.