HSA’s—Spend It or Save It?
By Brandon Clark, CPA
Do you have a Health Savings Plan (HSA) through work? These are available to people whose health insurance is a high deductible plan – and can be a great short or long-term part of your plan. What’s so great about them?
1.) HSAs are more useful that a “use it or lose it” healthcare Flexible Spending Account (FSA) available at many workplaces. HSA account balances can be saved for later use in your life – the money is yours forever, and you can leave it to your children.
2.) You can contribute more to an HSA, and you can invest the account for long-term growth if you wish.
3.) HSA accounts have the most tax benefits of any type of savings or investment.
Want to learn more about how you can take maximum advantage of these powerful accounts?
Tax Benefits
HSA accounts are tax superstars! They offer three different tax benefits:
Pre-tax Contributions – HSA contributions are subtracted from your income on your tax return.
Tax-free growth – You wont get a tax bill while the account is growing.
Tax-free distributions – When you withdraw funds for qualified medical expenses (most normal medical costs, including long-term care insurance premiums) you receive those funds TAX-FREE.
If you take money out for non-medical costs, you will have to pay taxes on the withdrawal (like from an IRA). If you are under age 65, there may be penalties also.
Contribution Limits:
As of 2022:
Single $3,650
Family $7,300
Over age 50, catch up bonus contributions $1,000
It can be a powerful strategy to contribute the full amount each year, investing your contributions and leaving the account to grow!
Why HSAs are beneficial in retirement
HSAs are a great opportunity for increasing your retirement assets. It is very beneficial to have well-funded HSAs to pay for your medical costs tax-free! Many HSAs have a wide array of investment options like IRAs, allowing you to invest them for use in your 70s and 80s.
In addition to medical expenses more commonly thought of as eligible expenses (doctor visits, copays, prescriptions, etc.), HSAs can be used for long-term care insurance premiums (up to the allowable limit determined by age) and Medicare premiums (Parts B, D and Medicare advantage plans).
Should you spend funds from your HSA before retirement?
Great question – Let’s think of your options:
1.) Spend your HSA now if you don’t have the funds you need to pay for your medical care, and you would have to go into debt to cover them. If you are able to save even part of each year’s contribution it will help you prepare for retirement.
2.) Save and invest your HSA if you can pay your medical costs out of current income or savings. The long-term benefits are worth it!
3.) If you get into a tough position, you can use some of your HSA for expenses incurred in a previous tax year, as long as you have the receipts. This can be a helpful option in case you are facing lots of expenses and struggling to find the funds.
Get help and advice! This sort of issue is one that we commonly discuss with our clients at Toler Financial Group – it can be challenging to prioritize your options in a complicated situation. HSA accounts can be a powerful and flexible tool to help you build a strong retirement.
Frequently Asked Questions About Health Savings Accounts (HSAs)
What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals enrolled in a qualified high-deductible health plan (HDHP). HSAs can be used to pay for eligible medical expenses now or saved and invested for future healthcare costs.
How does an HSA work?
You contribute pre-tax money into an HSA, the account grows tax-free, and withdrawals for qualified medical expenses are also tax-free. Many people use HSAs as both healthcare savings tools and long-term retirement planning accounts.
What are the tax benefits of an HSA?
HSAs offer three major tax advantages:
Pre-tax contributions
Tax-free investment growth
Tax-free withdrawals for qualified medical expenses
These benefits make HSAs one of the most tax-efficient savings vehicles available.
Who qualifies for an HSA?
To qualify for an HSA, you generally must be enrolled in a high-deductible health insurance plan that meets IRS eligibility requirements.
What is the difference between an HSA and an FSA?
Unlike Flexible Spending Accounts (FSAs), HSA funds are not “use it or lose it.” HSA balances roll over every year, remain yours permanently, and can even be inherited by beneficiaries.
Can HSA funds be invested?
Yes. Many HSAs allow account holders to invest contributions in mutual funds or other investment options similar to retirement accounts, allowing for long-term tax-free growth.
What can an HSA be used for?
HSAs can be used for qualified medical expenses such as doctor visits, prescriptions, copays, dental care, vision care, Medicare premiums, and certain long-term care insurance premiums.
Can HSAs be used for retirement healthcare expenses?
Yes. HSAs can be especially valuable in retirement because withdrawals for qualified healthcare expenses remain tax-free, helping cover medical costs later in life.
Can an HSA pay for Medicare premiums?
Yes. HSA funds may be used tax-free for Medicare Part B, Part D, and Medicare Advantage premiums, subject to IRS rules.
Should I spend my HSA now or save it for retirement?
If possible, many financial professionals recommend paying current medical expenses out-of-pocket and allowing HSA funds to remain invested for long-term growth and future retirement healthcare costs.
What happens if I use HSA money for non-medical expenses?
Withdrawals for non-qualified expenses are generally subject to income taxes, and individuals under age 65 may also face additional penalties.
Can I reimburse myself later from an HSA?
Yes. As long as you keep qualified medical receipts, you may reimburse yourself from your HSA in a future year for eligible expenses incurred after the account was established.
What are the HSA contribution limits?
HSA contribution limits are set annually by the IRS and vary based on individual or family coverage. Additional catch-up contributions are available for eligible individuals age 55 and older.
Are HSAs good for long-term financial planning?
Yes. HSAs can serve as powerful long-term savings tools because of their triple tax advantages, investment potential, and ability to cover healthcare expenses in retirement.
Can I leave my HSA to my children or beneficiaries?
Yes. HSA balances can pass to beneficiaries after death, although tax treatment may vary depending on the beneficiary relationship.
Should I work with a financial advisor to manage my HSA?
A financial advisor can help determine how an HSA fits into your broader financial plan, including retirement planning, tax strategy, healthcare budgeting, and investment management.
