An HSA can be Healthy Supplement to your Wealth-Building Regimen
Health Savings Accounts (HSAs) allow eligible individuals to lower their out-of-pocket health care costs and federal tax bills. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if you’re eligible.
Not only can an HSA be a powerful tool for financing health care expenses, it can also supplement your other retirement savings vehicles. Plus, it offers estate planning benefits to boot.
HSAs by the numbers
Similar to a traditional IRA or 401(k) plan, an HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. (Withdrawals for nonqualified expenses are taxable and, if you’re under 65, subject to a penalty.)
An HSA must be coupled with a high-deductible health plan (HDHP). For 2024, an HDHP is a plan with a minimum deductible of $1,600 ($3,200 for family coverage) and maximum out-of-pocket expenses of $8,050 ($16,100 for family coverage).
Be aware that, to contribute to an HSA, you must not be enrolled in Medicare or covered by any non-HDHP insurance (a spouse’s plan, for example). For 2024, the annual contribution limit for HSAs is $4,150 for individuals with self-only coverage and $8,300 for individuals with family coverage.
If you’re 55 or older, you can add another $1,000 annually. Typically, contributions are made by individuals, but some employers contribute to employees’ accounts.
Cost-saving benefits
HSAs can lower health care costs in two ways: 1) by reducing your insurance expense (HDHP premiums are substantially lower than those of other plans) and 2) allowing you to pay qualified expenses with pretax dollars.
In addition, any funds remaining in an HSA may be carried over from year to year and invested, growing on a tax-deferred basis indefinitely. This is a huge advantage over health care Flexible Spending Accounts, where the funds must be spent or forfeited (although some employers permit employees to carry over up to $500 per year). When you turn 65, you can withdraw funds penalty-free for any purpose (although funds that aren’t used for qualified medical expenses are taxable).
To the extent that HSA funds aren’t used to pay for qualified medical expenses, they’re treated much like those in an IRA or a 401(k) plan.
Estate planning benefits
Unlike traditional IRA and 401(k) plan accounts, with HSAs you don’t need to take required minimum distributions once you reach age 73. Besides funds used to pay qualified medical expenses, the account balance continues to grow on a tax-deferred basis indefinitely, providing additional assets for your heirs. The tax implications of inheriting an HSA differ substantially depending on who receives it, so it’s important to consider your beneficiary designation.
If you name your spouse as beneficiary, the inherited HSA will be treated as his or her own HSA. That means your spouse can allow the account to continue growing and withdraw funds tax-free for his or her own qualified medical expenses.
If you name your child or someone else other than your spouse as beneficiary, the HSA terminates and your beneficiary is taxed on the account’s fair market value. It’s possible to designate your estate as beneficiary, but in most cases that’s not the best choice. A non-spouse beneficiary other than your estate can avoid taxes on any qualified medical expenses that you incurred prior to death, paid with HSA funds within one year after death.
© 2024
