How HSAs Can Be Good for Your Health and Your Wallet
Health savings accounts (HSAs) have grown in popularity over the last few years as a way to help offset the expenses of qualified high-deductible health plans. In 2022, the IRS allows individuals to contribute up to $3,650 to an HSA ($7,300 for families). Those age 55 and older are eligible to make an additional $1,000 catch-up contribution. Well-known benefits of HSAs are that they can help cover qualified medical costs and high deductibles while also providing employees with a savings vehicle for future medical expenses. However, there are also several lesser-known benefits to contributing to an HSA, including the following.
Benefit #1 – Triple tax advantages
One of the biggest benefits of contributing to an HSA is that this type of account offers tax advantages on three fronts:
- Because contributions are made with pre-tax dollars, they reduce an individual’s taxable income.
- HSA funds grow tax-free in the account.
- When used to pay for eligible medical expenses, HSA withdrawals are tax-free.
In addition, HSA contributions made via payroll deduction are not subject to Social Security and Medicare taxes and, unlike 401(k) contributions, there are no required minimum distributions from the account.
Benefit #2 – Retirement savings
In a recent study, Fidelity estimated that an average retired couple age 65 in 2021 will need approximately $300,000 in after-tax savings to cover retirement health care expenses.1 Fortunately, unused HSA contributions can be saved to fund future health care costs. And, because HSAs allow the funds to be invested (once certain asset levels are achieved), assets invested have the potential to grow over time and enhance an investor’s retirement savings. Once you turn 65, distributions can be taken from an HSA for non-medical expenses to supplement retirement income penalty-free (but the distributions will be treated as ordinary income, much like an IRA distribution).
Benefit #3 – Flexibility
If you make payroll deferrals to your HSA, you have the flexibility to change your contribution amount at any time, not only when a qualifying event occurs. And, any unused funds automatically roll over to the next year. HSAs also allow you flexibility to pay for current medical expenses out of pocket and request tax-free distributions in the future to cover those expenses. This strategy essentially allows you to use the account as an emergency savings vehicle. Just be sure to save all receipts for medical expenses so you can claim reimbursement in the future.
Benefit #4 – Portability
Unlike flexible spending accounts (FSAs), your HSA is not tied to your employer. Instead, you own the account and can take funds with you when you leave employment. The money in your HSA remains available to pay for qualified health care expenses, regardless of where you work. If you participate in a high-deductible health plan, it may make sense to maximize your HSA contributions in order to take advantage of the benefits noted above. At Creative Planning, we’re here to help you make financial decisions that are in your long-term best interest. For help navigating the pros and cons of saving in an HSA, or for any other financial matter, please schedule a call.
