How to Maximize the Benefits of Your Health Savings Account

Health Savings Accounts are one of the most underutilized tax savings tools out there. And even if you have one, you might not be taking full advantage of all the benefits. Let me explain briefly what a Health Savings Account is and expand on some of the most common misconceptions and overlooked benefits.

Before we get started an editor’s note: in the financial planning world, we are guilty of using too many acronyms. But to keep this blog an acceptable length, I shall refer to Health Savings Accounts also as HSAs.

So, what the heck is a Health Savings Account?

An HSA is an investment account that allows you to save for medical expenses. But that’s not all! The money you put in is tax-deductible and the money you take out is tax-free (when used for qualified medical expenses). And don’t let the name fool you. Even though the word “savings” is in the name, this doesn’t mean your cash must sit in a bank savings account just earning interest…which leads me to my first common misconception.

Tip #1: Money in an HSA does not have to be in cash.

You can invest this money just like you do your 401k or other retirement or investment account.

Who is eligible for a Health Savings Account?

The most important requirement for owning one of these magic accounts is that you are enrolled in a high deductible medical insurance plan. Check out Healthcare.gov to find out the most up to date definitions and minimums of a high deductible plan. If you get your insurance through your employer, it’s likely they will provide the benefit of setting up an HSA. Some employers will even contribute to your account. This brings me to another misconception:

Tip #2: If your employer does not offer an HSA to go with your high deductible insurance plan, this does not mean you can’t set up your own account.

And if you are self-employed and have a high deductible plan, you most certainly should set up an account for yourself.

How much can you contribute to a Health Savings Account?

The IRS sets the limits each year on how much you can put into an HSA. In 2019 this was $3,500 for a single person and $7,000 for a family. These figures might not seem like a lot, but consider someone who is just starting out in the workplace. They open an HSA at age 25, add the maximum to this account each year and then decide to use this money only after they are no longer working at age 65. This person could have now amassed a medical savings account of over $330k (assuming before 40 years at 4% ROR and $3,500 contributed per year).

Tip #3: The money in your health savings account does not have to be spent in the same year you put it in (unlike Flex Savings Accounts).

You can start saving during your working years to use this money for medical costs in your non-working years when medical bills are most likely to be higher.

 You can play catch up!

The IRS allows for what is called a “catch up” for people putting money into an HSA who are over the age of 55 in the amount of $1000 per person (over 55). This is important not only for you but also for your spouse — and another commonly overlooked benefit. It’s not just the working spouse who can add extra money when they are both age 55.

 Tip #4: Non-working spouses or spouses covered by their partner’s high deductible plan can also open their own HSA and add money if they are over 55. 

 The catch here is that the non-working spouse must open their own account. There is no such thing as a joint HSA account.

Does your income change the rules?

The amount of income you earn or don’t earn does not affect your ability to add money to an HSA. This is much different than other tax-saving opportunities you might come across like IRAs and Roth IRAs. Let’s assume you retire at age 60 and are covered by your employer’s medical plan until age 65. For the next 5 years, you can continue to contribute to this HSA even though you have no earned income.

 Tip #5: There are no income restrictions for contributing to your HSA.

 High-income earners and people with no income at all can still contribute to an HSA as long as they are covered by a high deductible insurance plan.

 Does Medicare change the rules?

When do you stop becoming eligible for the opportunity to save in this fantastic way? It’s not necessarily when you are 65, but typically, it is. Because this is the time most people enroll in Medicare. This comes as a shock to some people.

Tip #6: When you enroll in Medicare part A you can no longer contribute to your HSA.

 But you can now spend that money on Medicare premiums along with other medical-related expenses. Why is this the case? Medicare part A becomes your primary insurer when you sign up for it, and Medicare part A is not a high deductible plan.

The hidden gem in your HSA strategy!

There is one other little gem I want to tell you about regarding the Health Savings Account.

Tip #7: Once in everyone’s lifetime you can use money in an IRA to make your annual contribution to your HSA.

Why is this a gem? The money from your IRA was tax-deductible going in and would be taxable going out. But now you’ve moved money that would usually be taxed when you need it and put it in a place where it might never be taxed if spent on medical needs.

 As with all investment accounts and tax-saving opportunities, it is best to consult a financial advisor when considering your options. These plans and the strategies around them should be tailored to fit your individual needs. But if you are offered a high deductible plan or are already in one, you should be taking note of these extra cost saving benefits.

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