Health Savings Account (what you don't know)
Health Saving Accounts (HSA) is the ONLY area in the tax code that has a TRIPLE tax benefit.
This means:
Contributions receive a tax-deduction (against ordinary income)
Money grows tax-deferred
Distributions matched with qualified medical expenses are TAX-FREE
HSAs are only available if you have a high-deductible medical health plan (HDHP).
For 2022, the IRS defines a high deductible health plan as health plans with a deductible of:
$1,400 for an individual
$2,800 for a family
These plans do offer a cap on total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) of:
$7,050 for an individual
$14,100 for a family
Contribution limits for 2022 are:
$3,650 (self-only) or $7,300 (family)
Age 55+ catch up = $1,000
Note: If both you or your spouse is eligible and will make a catch-up contribution, one of you will have to open a separate HSA for his or her catch-up.
Contributing to an HSA doesn’t impact your ability to contribute to a Traditional or Roth IRA.
Unlike your IRA accounts, an HSA doesn’t have income limits - you can make $1,000,000 per year and still use your HSA.
This is a great opportunity for high income earning individuals to reduce their taxable income and grow their wealth tax-free.
The caveat to qualify for tax-free distributions are that they are made for qualified healthcare expenses. This could include:
Insurance premiums
Long-term care services
Medicare
Capital expenses used to install special equipment in your home or car
See a full list of deductible expenses via IRS Publication 502
There are some items that are specifically not deductible, those are also listed in IRS Publication 502, but a few popular expenses are below:
Cosmetic Surgery/Hair transplant
Baby sitting
Funeral expenses
Nutritional supplements (unless recommended by a medical practitioner recommended to treat a special medical condition diagnosed by a physician)
With a deductible of $1,400 for individuals and $2,800 for families, that’s quite the upfront expense before insurance starts to help you out.
This isn’t an inconsequential amount!
Is this deductible and total out of pocket costs high?
Yes.
Could you have to pay more out of pocket than expected?
Yes.
BUT this is why you plan.
One of the general principal tenets of financial planning is to have an emergency fund.
If you’re relying on a single income, shoot for ~6 months of living expenses.
If you’re relying on dual income, shoot for ~3 months of living expenses.
This will reduce surprises that can arise from unexpected medical costs.
The point of having adequate cash reserves is so you can absorb the high costs from these expenses.
But here’s the best part:
The IRS has no deadline for when you must match the qualified medical expense with the distribution from the HSA.
The implications?
You pay for your medical receipts from your pocket, save the receipts, then at a later date, can redeem those dollars tax free!
This opens the opportunity for your HSA to act similar to a Roth IRA.
As long as future legislation doesn’t define a deadline for matching qualified medical expenses with distributions from the HSA and you keep organized records, this could be an invaluable tool for you to develop a sizable basket of tax-deductible and tax-free wealth (you don’t hear those words used together).
If you do not use this account for qualified medical expenses the distribution is non-qualified and taxed as income plus a 20% penalty.
After age 65 the 20% penalty falls off in which this account acts like a Traditional IRA.
Meaning, the distributions not used for qualified medical expenses after 65 are subject to ordinary income tax (with no 20% penalty).
Your health savings account isn’t subject to required minimum distributions (RMD), so if you’ve been diligently saving the maximum amount into your HSA and the account is worth $300,000 at age 65 - this can act as another vehicle to fund your retirement without having to deal with RMDs.
There’s a rule not many are familiar with - if your child is covered by your high deductible health plan but isn’t a tax dependent, they can max out their OWN family HSA - with no earned income requirement!
This could be a great opportunity for your child to get a head start on their future medical costs, or, if he’s playing the long game, another supplemental retirement account.
Unlike a flexible spending account (FSA) your health savings account dollars do not expire at year end and can be rolled over year over year.
Don’t neglect the power of your health savings account!