Health Savings Accounts: Maximize the Tax Advantages
Health Savings Accounts (HSAs) were created to help individuals with high-deductible health care plans manage their medical expenses, and they have three significant tax advantages:
1. Contributions are tax deductible, even if you do not itemize on your return.
2. Capital gains and interest are tax-exempt.
3. Distributions for qualified medical expenses are tax-free.
While Flexible Health Savings Accounts (FSA) offer tax savings for medical expenses, they require the funds to be used during the calendar year. HSAs can continue to hold funds for the long-term, eliminating the prospect of giving up assets in the account at the end of the year or if you switch employers.
Many individuals use their HSAs to immediately cover their medical expenses over the course of the year. However, HSAs can be integrated into your long-term retirement savings plan by allowing the account to grow. As medical costs continue to rise, most people can expect to face larger health related expenses during retirement. Contributions made to your HSA today can be used to cover medical expenses after you retire, including prescription drugs, dental expenses, and Medicare premiums. Here are the annual contribution limits for 2022 and 2023:
| Health Savings Account Contribution Limits | ||
|---|---|---|
| 2022 | 2023 | |
| Individual | $3,650 | $3,850 |
| Family | $7,300 | $7,750 |
| 55+ "Catch Up" | $1,000 | $1,000 |
You have until April 15 to complete a contribution for the previous year. Many large employers offer matching contributions to employee HSAs, which is an excellent way to help the account grow quickly.
Some HSA providers partner with Charles Schwab and allow individuals to open Health Savings Brokerage Accounts, which can be managed by your investment advisor. It’s a great way to have all your accounts in one place, working together to meet your investment goals.
By creating a long-term plan, you can take advantage of the tax savings and use your HSA as an additional source of funds to cover your medical expenses in retirement.
Terri Velgara, CFP®
Terri is a Financial Advisor and Director of Financial Planning at Rappaport Reiches Capital Management. She serves as a resource for our firm's advisors in designing plans that empower clients to achieve their personal and financial goals. Please connect with Terri below. She loves to talk about investing, financial planning, and family game nights!