What is an HSA?
A health savings account is a tax-exempt trust or custodial account that allows you to set aside funds on a pre-tax basis to pay for qualified medical expenses. The trustee can be a bank, an insurance company or any entity approved by the Internal Revenue Service to be a trustee of an individual retirement account (IRA). The trustee is separate from your health plan provider. You can deduct contributions to your HSA even if you don’t itemize your deductions on Schedule A of your tax return.
What kind of health insurance plan has an HSA?
In order to be eligible to have an HSA, you must participate in a high-deductible health insurance plan.
What is a High Deductible Health Insurance Plan (HDHP)?
For 2020, The Internal Revenue Service defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s totally out-of-pocket expenses (including deductibles, copayments and coinsurance) cannot be more than $6,900 for an individual or $13,800 for a family. This limit does not apply to out-of-network services.
What are Qualified Medical Expenses?
Qualified medical expenses are those expenses that generally would qualify for the medical and dental expenses deduction. These expenses are outlined in IRS Publication 502.
Are withdrawals ever taxed?
Yes. If you take funds from your HSA for non-qualified medical expenses, you will pay a tax on the withdrawal. You may also be subject to an additional 20% tax.
How much can I contribute to an HSA?
For 2020, you can contribute up to $3,550 for an individual plan and $7,100 for a family plan.
Who can contribute to my HSA?
Your HSA may receive contributions from you, your employer or a member of your family. However, the respective individual and family contribution limits apply.
What happens if I don’t spend the funds in my HSA?
Unused funds in an HSA can be rolled over from year to year. This is unlike a Flexible Savings Account, which requires the owner to use the funds in the calendar year.
How can I invest my HSA funds?
Typically, HSA account owners will simply have their account balance invested in an interest-bearing investment, making the account not unlike a savings account.
However, the trustee or custodian of your HSA may allow you to invest in mutual funds or exchange-traded funds through a sub-account within your HSA.
How do I use my HSA to pay expenses?
You’ll typically have a variety of options including an electronic bill-pay feature, a debit card and traditional checks.
How do I document my medical expenses?
According to the IRS, you must keep records that show that (a) the distributions were used exclusively to pay or reimburse qualified medical expenses, (b) the qualified medical expenses were not previously paid or reimbursed from another source, and (c) the medical expense were not take as an itemized deduction in any year.
Triple tax benefits
No other type of account offers a tax deduction, tax-deferred growth and tax-free withdrawals (for qualified medical expenses). In addition, you can roll the unused portion of the account over, year after year. The HSA is the killer tax benefit for young professionals
How to maximize your HSA
As a young professional, it may be hard to imagine being retired. But, let’s assume you do retire one day and live a very long life. One of your biggest expenses in retirement will be for health care.
If you fund your HSA annually throughout your career and use other funds to pay for your out-of-pocket medical expenses (i.e. co-pays, deductibles, and co-insurance), you can systematically grow a fund that you can access later in life to pay for health care costs. You can even use your HSA to pay the premiums on long-term care insurance if you choose to purchase it down the road.
Other strategies for young professionals
If you find yourself transitioning from one employer to another, you can use your HSA to pay for health insurance you receive through COBRA. You can also use your HSA to pay for health care coverage while receiving unemployment benefits under federal or state law.
If you’re able to grow your HSA and not access it to pay current medical expenses, you should consider investing in investments that align with your investment risk tolerance, your time horizon and your needs. So, if you’re in your 30s or 40s and don’t plan to access your HSA until you’re retired, it may be appropriate to invest a big percentage of the account in stocks, since they offer the prospect of higher returns over time.
If you do expect to use your HSA for current medical expenses, then you should make sure that the dollars you may need in the near term are invested conservatively. That may mean leaving them in low-risk interest-bearing investment. Estimate your maximum medical expenses for the year and “ring fence” those dollars.
How do I find the best HSA?
Your employer may control where you’re permitted to set up your HSA. But, if not, then you should look for an HSA that has low expenses, a competitive interest rate on cash balances, robust investment options, and a user-friendly online account management platform.
We found good reviews at Morningstar, Investopedia, and Bankrate.
Do you have questions about health savings accounts, and building a robust plan for your financial future? Contact us today to see how our team at Springwater Wealth can help you.
If you need additional guidance
If you need help thinking through your health plan options and the role of an HSA, consider working with a CERTIFIED FINANCIAL PLANNER™ (CFP®).