A Health Savings Account (HSA) is a tax-advantaged vehicle designed for individuals covered under a high-deductible health plan (HDHP) to pay for qualified medical expenses. Contributions, whether from the individual or employer, are made pre-tax, grow tax-free, and can be withdrawn tax-free to pay for medical, dental, long-term care, and prescription drug expenses. Often termed as having a ‘triple-tax benefit’, HSAs are an attractive component of retirement planning alongside 401(k)s, IRAs, and other investment vehicles.
In 2024, an individual may contribute a maximum of $4,150 to their HSA. Families are permitted a maximum of $8,300, with those over the age of 55 eligible for a catch-up contribution of $1,000 in addition to the annual limit. Unlike Flexible Spending Accounts (FSA), HSAs are not subject to the ‘use it or lose it’ rule and may be carried forward indefinitely.
To qualify for an HSA, an individual must meet all of the following conditions:
- Be covered under a high-deductible health plan (HDHP).
- Not be enrolled in Medicare (though eligibility is allowed).
- May not be claimed as a dependent on another person’s tax return.
HSAs offer several advantages that assist individuals in managing medical expenses and preparing for retirement. Some additional benefits include:
- Investment Options
HSA contributions are invested and may provide a greater return than a traditional savings account. By allowing your money to grow tax-free, you can build a nest egg for future medical costs and retirement.
- Portability
HSAs are not linked to one specific employer, granting an individual the ability to maintain the account should they change jobs. This component of an HSA highlights its flexibility and long-term use potential.
- Eligible Expenses
HSA funds may be used to cover a variety of medical related expenses including deductibles, co-pays, dental, Medicare premiums, long-term care, vision, prescription drugs, and other medical expenses not covered by your health insurance plan. However, non-qualified expenses may incur income tax and a 20% penalty, unless the individual is aged 65 or older.
- Family Coverage
HSAs may be used to cover qualified medical expenses for family members even if they are not covered under a HDHP.
Aside from catch-up contributions, there a few other notable reminders for individuals over the age of 55. The HSA may be used throughout retirement and can be used to pay for Medicare premiums. Once an individual reaches age 65, they may withdraw HSA funds for non-medical expenses without incurring a penalty, however, these distributions will be subject to income tax.
Understanding how HSAs and Medicare coexist is crucial to avoid any unnecessary penalties. Once an individual enrolls in Medicare they may no longer contribute to their HSA. One feature of Medicare that is often overlooked is once you enroll in Medicare Part A, the coverage backdates six months. Individuals should cease making contributions to their HSAs six months prior to enrolling in Medicare or when they begin receiving Social Security benefits. If you have already contributed to your HSA during this six-month window do not worry, for as long as you withdraw that amount before year’s end you will not be penalized.
More, once an individual claims Social Security benefits they are automatically enrolled in Medicare Part A. If an individual claims Social Security prior to reaching age 65, they will be automatically enrolled in Medicare Part A once they attain age 65. In both scenarios the individual must not make any contributions to their HSA to avoid penalty, even though they did not actively apply for Medicare.
Health Savings Accounts (HSA) offer a multitude of benefits for individuals seeking to cover their medical bills and effectively save for retirement. With features like investment options, a wide range of eligible medical expenses, portability, and favorable tax treatment, the HSA can serve as a versatile investment tool.
Presented by Jack Russell
