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Should I contribute to an HSA account?
Answered By
Alyssa Calhoun
Associate Wealth Advisor, Director of Client Communications at CAM Investor Solution
Question
Answer
Recent years have seen health savings accounts (HSAs) grow in popularity across the United States. At the end of 2020, it was estimated that 63 million people made use of an HSA to pay for qualifying medical costs, and the total number of accounts rose 8% in 2021. These unique accounts enable you to save money on healthcare expenses and ultimately pay less in taxes. However, not everyone is eligible to enjoy the benefits of an HSA, and one may not make sense for you based on your individual circumstances.
To help you decide whether or not opening an HSA is the best course of action for you, we’ve broken down some of the most important factors for you to consider.
What is an HSA and how does it work?
Those enrolled in high-deductible health plans (HDHPs) can open an HSA, which is a tax-advantaged investment vehicle designed help people save money for medical expenses. Contributions are made on either a pre-tax or post-tax basis and the contents of the account can be invested, potentially growing over time, before being used to cover eligible healthcare costs. Among the things HSA funds can be used for are prescription medications and dental, vision, and medical care. You’re allowed to make contributions to your HSA up to the annual contribution limit, which is prescribed the IRS. The contribution limit for 2022 is $3,650 for individuals and $7,300 for families, while those over 55 years old have the option to commit another $1000 in “catch up” contributions. You can arrange to have contributions automatically deducted from your paycheck should your employer offer an HSA, and your employer may even offer to match a portion of your contribution.
If your employer does offer an HSA, you will receive a card or check linked to your HSA balance that can be used to cover any qualifying medical costs. If not, you can open one on your own, provided you fulfill the requirements and have a qualifying insurance plan.
What are the benefits of investing in an HSA?
The benefits of utilizing an HSA can be both vast and appealing to investors. From the tax advantages they unlock to the convenience they provide, here are some of the different reasons why you might want to consider investing in a health savings account
Tax Benefits
When it comes to using an HSA for your health savings vehicle, there are three important tax benefits to consider—often referred to as a “triple tax advantage.” When funding your HSA, you can deduct your post-tax contributions up to the IRS limit, thus lowering your taxable income. Contributions made with pre-tax dollars don’t entitle you to a deduction. Further, when you use your HSA to pay for qualified medical expenses, you’re not required to pay federal income taxes on the withdrawal. Lastly, any appreciation of the funds invested within your HSA is free from federal income tax.
Contributions Roll Over
The money you’ve committed to your HSA never expires. If you move to a new state, switch jobs, lose your job, or change healthcare plans, your HSA funds will move with you. Remember that if you switch to a healthcare plan that isn’t eligible for HSA contributions, such as Medicare or another non-HDHP, you will not be able to contribute to your account in the future without paying hefty tax penalties. However, you can always use the money in your HSA balance to cover eligible medical costs. Additionally, if you name a beneficiary, your HSA and its contents will be passed onto your heirs.
HSA Investing
Your decision to invest in an HSA affords you federal tax-free earning potential. The option to invest your HSA balance across a variety of securities—such as stocks, bonds, ETFs, and mutual funds—can help you grow your investment significantly over time. You can start investing within your savings account at any time, and the sooner you get started, the more time you’ll have to potentially accumulate a comfortable retirement healthcare fund.
Family Benefits
An HSA can empower you to care not just for yourself, but for your loved ones, too. Even if your high-deductible healthcare plan does not cover your spouse and other dependents, their eligible medical expenses can be paid for using your HSA funds. Adult children can be HSA-eligible even if they are married or do not live with you anymore, as long as they remain under your insurance plan. In most states, they can do so until they turn 26.
Additional Retirement Savings
HSAs aren’t technically retirement accounts, but they can still prove invaluable in the pursuit of your retirement goals. If you are over 65 and healthy, you can deploy your HSA funds however you’d like—not just on medical expenses—without incurring a penalty or fee. Just pay standard income taxes on the withdrawal as you would with a traditional IRA. So, if you’re already maxing-out your contributions to your 401(k) and IRA accounts, an HSA can allow you to stash away another $3,650 per year for individuals, or $7,300 for families.
Are there any downsides to using an HSA?
Unfortunately, there can be certain disadvantages associated with using an HSA. To qualify for an HSA, one must have a high-deductible healthcare plan, and these aren’t always practical or available to all investors. Depending on the financial institution you choose to partner with, some HSAs come with frequent transaction or maintenance fees. Although they tend not to be excessively high, these fees can accumulate and have a significant impact on the value of your account over time, sometimes outpacing whatever interest the account might yield. That said, you may be able to avoid some of these charges by maintaining a minimum balance.
Some may be hesitant to seek medical attention when they need it because they don’t want to use the money in their HSA account. HSAs entail record-keeping obligations that may be challenging to manage, including procedures that must be followed for withdrawals and filing requirements for contributions.
The Bottom Line
Under current US tax conditions, HSAs are among the most advantageous savings and investment tools available to taxpayers. Medical costs often rise as one ages, especially once they’ve entered retirement. If you are eligible, beginning to contribute to an HSA early and letting it grow over the course of your lifetime can go a long way toward securing a healthy and comfortable future.
If you’re wondering whether or not an HSA makes sense for you, set up a free consultation and I’ll be happy to answer your questions and assist with planning for your future healthcare needs.
