Health Savings Accounts Offer a Triple Tax Advantage
By Jane Young, CFP, EA
A health savings account (HSA) is a tax advantaged savings account that helps those with a high deductible health plan pay for qualified medical expenses. There is no deadline to use the money, it carries over year to year. You can use it immediately, for medical expenses down the road, or as a retirement savings vehicle.
The downside to an HSA is you must have a qualified high deductible health plan (HDHP) and not be enrolled in Medicare to be eligible. In 2023 an HDHP plan must have a minimum deductible of $1,500 for self-only plans and $3,000 for family plans and maximum out-of-pocket of $7,500 for self-only plans and $15,000 for family plans. Generally, you are not eligible if you have another health coverage plan, in addition to your HDHP.
On the positive side, an HSA is the most tax advantaged plan recognized by the IRS, offering a triple tax advantage. Similar to a traditional IRA or 401(k), contributions to an HSA are tax deductible and your account grows tax free. Withdrawals used to pay for qualified medical expenses are tax free, similar to withdrawals on a Roth IRA. You can make contributions directly or through your employer. Contributions made through payroll deductions are not subject to Medicare or Social Security.
Anyone over age 65 can use money from an HSA for any reason. After age 65, distributions that are not used for qualified medical expenses will be taxed but are not subject to a penalty. Additionally, there is no required minimum distribution on HSA accounts.
Unfortunately, the IRS has placed contribution limits on HSA plans. In 2023 the HSA contribution limit is $3,850 for self-only plans and $7,750 for family plans. In 2024 the HSA limit is $4,150 for self-only plans and $8,300 for family plans. There is also a catch-up provision of $1,000 for those age 55 or older. Contributions are not limited based on income.
Money in an HSA is always yours and it stays with you if you change jobs, health care plans, or you retire. Once you are no longer covered by an HDHP you cannot contribute to your HSA, but it remains in place to cover future expenses.
HSA funds are held by a trustee - a bank, credit union, or financial institution. You can open an account directly or you may be able to open an account through your employer. Depending on where your account is held, you may be able to invest the money in cash, CDs, stocks, bonds, mutual funds, or ETFs.
The IRS allows the transfer of your HSA to a new provider once a year, without tax consequences. The most common reason to transfer your account is a change in employment or retirement. You may want to transfer your account to consolidate accounts, gain access to more investment options, improve customer service, or reduce fees.