Triple Tax Advantaged Health Savings Account’s (HSA’s) Are Amazing!

Are You Missing Out?

Back in 2012 I wrote about my Health Savings Account (HSA) when my account balance was $23,000 and counting. Six years later, my balance is up to $78,000! I put my annual HSA saving above every other saving plan I contribute to. In 2019, married couples can put $7,000 away annually and single people $3,500.  It is the most tax advantaged investment wrapper you can possibly use in your long-term planning.

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Since 2003 individuals, families, employers and employees were allowed to make federally income tax deductible contributions into a special account known as a Health Savings Account (HSA).  This financial planning option combines a tax-deductible savings plan, with a high deductible health insurance plan.

In order to qualify for having a HSA you must have a qualifying High Deductible Health Plan (HDHP):

The following requirements must be met:

• Minimum deductible: $1,350 individual; $2,700 family

• Out-of-pocket maximum (includes deductible): $6,750 individual; $13,500 family

• No services paid for prior to meeting deductible (except for preventive care)

• No deductible required for preventive care

• For family coverage: family deductible must be met before any reimbursement can be made

• No prescription drug copayments

• Higher limits allowed for non-participating provider services

What’s so great about HSA’s?

I love that my contributions are federally tax-deductible (no income restrictions)!  When I have qualified medical expenses, I can draw from this account tax-free.   Unlike flexible spending accounts, whatever money I don’t spend from my HSA each year stays in my account and grows tax-free. Because of the tax benefits, I don’t spend the money in my HSA unless I have no other choice. Distributions for non-medically approved expenses are taxable and subject to a 20% penalty.

Health Savings Account Basics:

Health Savings Accounts (HSA) are tax-deductible savings plans that allow a taxpayer to save pre-tax dollars for future healthcare expenses. HSA’s are paired with high-deductible health insurance plans. Contributions to an HSA are federally income tax-deductible. Unlike IRA’s, there is no income restriction for contributors. Earnings, such as interest, dividends and capital appreciation in the health savings account are tax-exempt at the federal level. Withdrawals from a health savings account are tax-free as long as the funds are used for qualified medical expenses. (See IRS Publication 502, Medical and Dental Expenses for what counts as qualified medical expense).

• Income tax deductible

• Tax Deferred growth

• Tax-free withdrawals when used for medically approved expense

Like any family, we have had medical bills along the way.  While I never want to touch this tax haven account, we have made withdrawals from the account to pay for a variety of medical expenses including: two broken arms, dental checkups and prescriptions. After those withdrawals, my Health Savings Accounts is still worth over $60,000!

I keep at least $5,000 in an HSA interest bearing checking account that is used when I have medical expenses and the rest is invested in individual stocks and mutual funds under the HSA account title. At the pace we are going,  I might reach an account value of $200,000 by the time I reach retirement!  That should give me plenty of money to pay for a hip or knee replacement if I need to.  HSA Savings Calculator

Expanded Benefits After Age 65

At 65, you will also gain some new benefits with your HSA. Certain insurance premiums can be paid tax free with HSA distributions after you reach age 65 and enroll in Medicare. You can pay for all Medicare premiums except Medigap. Employee payments of premiums for employer health insurance plans also qualify. You may also pay premiums for your spouse as long as you are age 65.

Distributions taken from your HSA after age 65 are never subject to penalty. What you use the funds for does not matter. All HSA distributions after age 65 are penalty free, even if the funds are not used for qualified health expenses. However, if you take a distribution that is not used for qualified medical expenses, it will be taxable.