A Health Savings Account (HSA) is a type of account one can contribute to if on an eligible High-Deductible Health Plan (HDHP).
Different from a Flexible Spending Account (FSA), an HSA is not a use-it-or-lose-it account. You retain ownership of the funds and account your entire life. An HSA can even be used as a tool in estate planning.
Contributions to an HSA have several tax benefits. The money you put in receives an income tax exclusion, and if contributing through an employer, you receive an additional FICA tax (social security + medicare tax) exclusion. Once the funds are in the HSA, there are no taxes for interest, dividends, or investment growth. When it is time to take money out, you pay no income taxes if used for eligible medical expenses.
Eligible medical expenses have a pretty wide range. Some lesser-known benefits include long-term health and long-term care planning. For Medicare, HSAs can be used to pay for Part B, Part D, and Medicare Advantage Premiums. For long-term care, HSAs can pay for insurance policy premiums and other long-term care costs like nursing homes, in-patient hospital care, in-home care, etc.
Given the flexibility and the tax benefits, an HSA can be an effective tool in financial planning. Here’s how I personally use my HSA along with many clients of our firm.
Contribute the maximum amount, which for 2024 is $4,150 for individuals or $8,300 if dependents are on your health plan. This is usually done in level contributions through payroll, or if self-employed, you can make a lump sum contribution.
The health insurance carrier will often send an HSA card. I would not use this and even suggest shredding it so you are not tempted.
Within your HSA, open a Health Savings Account Brokerage Account (HSBA). This allows you to invest your contributions. With our clients, we use an asset location strategy to take advantage of the tax benefits of an HSA. This means placing tax-inefficient investments like high dividend paying or interest investment positions in an HSA.
For clients with a healthy emergency fund, we treat the HSA contributions similar to 401(k) or Roth IRAs and invest more aggressively.
Create a system to save medical receipts. The IRS has no statute of limitations for reimbursing yourself. For example, a medical procedure that you paid $4,000 for in 2024 could be used to take $4,000 out of your HSA later on in life. Personally, I save medical receipts to a secure cloud folder and update them semi-annually.
It’s important to note that this, like other financial planning tools, is not a set-and-forget-it strategy. These steps are to be completed annually. To make sure this is recorded correctly, we check our client's paystubs periodically to ensure no over-contribution, their W2, and confirm all matches to Form 8889 with their tax return.
Have further questions or want to review your employee benefits and HSA, feel free to schedule a free consultation.
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