Health Savings Accounts (HSAs) are a powerful, tax-efficient way to save and pay for medical expenses. And in a country that’s known for high costs of healthcare, they’re an option worth exploring should your situation meet the requirements.
Together in this article, we’re going to review what an HSA is, who’s eligible to have one, and what benefits they offer users. Additionally, we’ll cover the specific guidelines that apply to them in 2023. Let’s get started.
What Exactly Is A Health Savings Account?
An HSA is a type of savings account that’s specifically designed to help its users pay for medical costs. It’s an attractive option for many given its numerous tax benefits, but it’s only available to those who meet certain, ongoing IRS criteria.
It’s also worth noting that HSAs are owned on an individual basis. Unlike similar accounts (ex: Flexible Savings Accounts), your involvement with one is not dependent on your retention of employment inside any specific organization. However, ongoing employment can be incentivized through HSAs as many employers offer matches to their employees’ accounts.
Who is Eligible For A Health Savings Account?
Now that you understand what an HSA is, let’s review the eligibility requirements. First, you have to be enrolled in a qualifying high deductible health plan (HDHP). What’s considered to be a qualifying HDHP will change overtime, but in 2023 it means:
- Your plan has a minimum yearly deductible of $1,500 for individual coverage, or $3,000 for family coverage. Your deductible is the amount you pay before your insurance chips in to help cover costs.
- Your plan has yearly out-of-pocket maximums of $7,500 for individual coverage, or $15,000 for family coverage. Your out-of-pocket costs will include your deductible, copayment, and coinsurance. This maximum is the most you will have to pay before your insurance covers everything else.
What Are The Benefits Of A Health Savings Account?
The biggest reason HSAs are so powerful is because they offer a unique, triple tax advantage. At every point in your money’s journey (i.e. contributing, growing, and withdrawing), you’re offered a tax shelter.
- Tax-Sheltered Contributions: You’re able to contribute to HSA directly with pre-tax dollars. Depending on your employment situation, you can have contributions made directly from payroll, or you can contribute the money yourself and claim the deductions later on. But be aware of 2023 HSA contribution limits (see note below).
- Tax-Sheltered Growth: The money inside your HSA has the ability to earn interest, and it can even be invested in mutual funds, bonds, and stocks. Any interest, dividends, or capital gains acquired won’t be taxed.
- Tax-Sheltered Withdrawals: As long as you’re using the money for qualified medical expenses, the money you take out of your HSA won’t be taxed (further details below).
Please Note: 2023 HSA contribution limits stipulate a maximum of $3,850 for individuals and $7,750 for families.
Other HSA Benefits
- Catch-Up Contributions: After you turn 55, you can make catch-up contributions to your HSA like you would a retirement account. These contributions are also tax free. But again, be aware of 2023 HSA contribution limits (see note below).
- Penalty-Free Non-Qualified Medical Expenses: After you turn 65, you’ll be able to start using HSA funds for non-qualified medical expenses at no penalty. In fairness, these withdrawals will be taxed as ordinary income. But your HSA starts functioning similar to a traditional IRA.
- No Required Withdrawing Age: Unlike many retirement accounts (ex: 401Ks and SIMPLE IRAs), you’re not mandated to start making withdrawals from HSA at a specific age. But please note, you can only continue making contributions if you have an HDHP. And you can no longer make contributions once you enroll in Medicare.
- HSAs Do Rollover: Unlike with a Flexible Savings Account (FSA), you don’t have to use your HSA funds within a specified time period. Your HSA funds do rollover into later years, and can be taken with you should you change jobs.
Please Note: 2023 HSA contribution limits cap catch-up additions at $1,000.
How Do I Set Up A Health Savings Account?
Remember, you first need to be enrolled in a qualifying high-deductible health plan to be eligible for an HSA. Once that requirement is met, you can start shopping out HSA options with a variety of providers.
These providers include credit unions, banks, and other financial institutions. One way to help determine the provider that’s right for you is to ask about their fees. Just like regular savings accounts, there will be ongoing fees associated with your HSA.
If you’re an employee, you can ask that pre-tax contributions be made directly to your HSA via payroll. However, you can also make the contributions yourself and later claim the appropriate tax deductions. This latter option may work best for those who are self employed or function as independent contractors.
Please Note: For 2023, your HSA’s contribution deadline is April 15th, 2024. You’ll need your account set up and contributed to before then to reap the tax benefits for 2023.
How Can Vertical Wealth Management Can Help You Further
At Vertical Wealth Management, we understand how important it is to have the right health plan in place. But we also know just how expensive the proper coverage can get. For these reasons, we work closely with our clients to help them get the most out of the protections they put in place for themselves and their families.
HSAs present an incredible tax opportunity to save, invest, and pay for your healthcare needs. Additionally, they provide ancillary benefits later on like penalty-free withdrawals for non-qualified medical expenses that can bolster the overall strength of your retirement.
Together we’ll be able to help you determine whether or not an HSA is right for you. And if it is, we’ll be your step-by-step partner in making sure the ongoing tax and investment decisions associated with your account are aligned with your long-term financial goals.
If you’re feeling overwhelmed in weighing your healthcare options, we completely understand. But you don’t have to do it all yourself. Please feel free to reach out to our team for a completely complimentary consultation. You can schedule your free appointment for a time that works best for you.