With the deadline looming for Americans to file their income tax returns, this is as good a time as ever to reflect on the
There were nearly 36 million HSAs last year, which was up from 32 million in 2022. More than $16 billion were held in these HSAs, helping people pay for healthcare expenses tax free. Unfortunately, research shows that only 27% of consumers grasp that HSAs can be used as investment vehicles. There is plenty that benefit advisers can do to close the gaping knowledge hole, starting with education.
But first, a quick refresher about these vehicles. An HSA is first and foremost a means of paying for qualified health care expenses. It is much like an individual retirement account (IRA) through which a tax-advantaged contribution is made to the account, and the money in that account earns income on a tax-free basis. Unlike an IRA, whose distributions are taxed, any amounts taken out of an HSA to pay or reimburse for qualified medical expenses are tax free.
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Account holders can contribute to an HSA if they are covered by a high deductible health plan (HDHP) after incurring a certain level of medical expenses that are not paid by the health plan (i.e., $1,500 for single coverage and $3,000 for family coverage in 2023). The contribution is limited to a certain dollar amount based on whether coverage is for an individual or family. The maximum contribution to an HSA for last year was $3,850 for single coverage and $7,750 for family coverage. Individuals who are over age 55 can make an additional contribution to their HSA of up to $1,000.
Beyond those basics, there's
There are other advantages. Unlike other medical benefits offered by employers, an HSA is not tied to employment. Amounts that are contributed belong to the account holder forever. That applies even if they leave their employer and move to another employer or are self-employed. As long as the money is used for a qualified medical expense, then it will not be taxed. If money is taken out from the HSA and it is not for qualified medical expenses, then the distribution will be taxed and. Those who haven't reached age 65 or are disabled are subject to an additional 20% penalty tax on the distribution.
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People use HSAs to pay for all types of healthcare expenses that aren't covered under their HDHP. Those expenses include prescription drug costs, over-the-counter medicines, menstrual care products, hearing aids, hospital services, lab fees, acupuncture, smoking cessation programs and much more. For a full list,
While HSAs are valuable on the health and welfare side of our industry, they pack even more powerful potential when it comes to retirement planning. Some financial advisers are recommending that those who are eligible to contribute to an HSA should wait and not take current distributions from their HSA to pay for current expenses. They say that the amounts contributed to the HSA will earn income on a tax-free basis like an IRA. But unlike an IRA, the amounts distributed after retirement in an HSA would be received tax-free as long as the individual could prove that the distribution was related to an earlier medical expense. That would make a dollar contributed to an HSA more valuable than a dollar contributed to an IRA.
Whether or not an HSA is an appropriate retirement savings vehicle depends on the individual having enough funds to pay for his or her medical expenses below the deductible without taking a distribution from the account. Studies show nearly half the owners of HSAs took distributions from their HSA to pay for medical expenses — meaning they did not have enough income to fund an HSA and pay for medical expenses that would not be covered by their HDHP.
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For people with enough income that they can make the full HSA contribution and pay for their medical expenses with other funds, the HSA can be a more tax-effective way to save funds to be used after retirement than an IRA. Now here's the rub: In order for those later distributions to be tax-free, the individual receiving the distribution should be prepared to show the IRS that he or she had incurred unreimbursed medical expenses since the time the HSA was established equal to the amount of the distribution. That means holding onto receipts for those expenses for a long time. Prudent record keeping and maintaining documentation of medical expenses is the way to earn the triple tax savings of an HSA during retirement.
There is no expiration date for money to be used in HSAs. Once a contribution is made to an HSA, the HSA owner alone decides how to invest those amounts and when a distribution is taken from the account. Depending on an individual or family's medical expenses, it may make sense to save and spend simultaneously and use the funds relatively quickly after contributing them, or it may work for them to save the contributions for later use. There is no penalty for maximizing the amount of money to contribute to an HSA, and in fact, there are tax savings benefits to doing so.
The bottom line is this: HSAs help people keep more of their hard-earned money, whether they spend it now on necessary medical expenses or later in retirement. They just need to be reminded to keep those receipts!
