Fall is officially here and that means health insurance open enrollment is right around the corner. You may be eligible to contribute to a Health Savings Account (HSA). Let's cover the basics of HSAs, and some smart ways to use them.
What is an HSA?
An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses such as deductibles, copayments, coinsurance, as well as over-the-counter medications. Also eligible are payments for dental and vision care — expenses that some health insurance plans may not cover.
Who is eligible to open an HSA?
An HSA is an option for people with high deductible health insurance. For 2023, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,500 for an individual or $3,000 for a family.
Can HSAs be used to pay health insurance premiums, including Medicare premiums?
Generally, HSAs cannot be used to pay private health insurance premiums, but premiums related to COBRA insurance, Medicare, and long-term care insurance may be HSA-eligible. Even if your Medicare premiums are automatically deducted from your Social Security check, you can take tax-free withdrawals from an HSA and reimburse yourself.
How much can I contribute to an HSA?
- The HSA contribution limits for tax year 2022 is $3,650 for self-only coverage and $7,300 for family coverage. Contributions need to be made by the tax filing deadline, April 18, 2023.
- Individuals 55 or older may contribute an extra $1,000.
What’s the advantage of an HSA?
HSAs are a "triple threat" when it comes to tax benefits. The money you contribute into an HSA is not taxed. The funds can be invested and grow tax-free. Withdrawals for eligible expenses are tax-free.
How should I use my HSA?
There are several smart ways to use an HSA. You can use your HSA as:
- A "pay as you go" fund for current and future medical expenses.
- A “rainy day” fund for future emergency expenses. If you need cash in the future, you can reimburse yourself for eligible costs incurred in prior years (keep your receipts).
- A supplemental retirement account. At age 65, an owner can take withdrawals for nonmedical expenses, and pay income tax on them, like traditional IRA withdrawals. If you are in a low tax bracket this may be a good strategy.
- A gifting strategy. If your child is no longer your tax dependent, and is enrolled in your high deductible health plan, you can gift up to $7,750 (the full family amount) to be contributed into their own HSA. It's a great idea to help out working college grads up until the age of 26, when they are no longer eligible to be on your health plan.
What happens to HSAs upon job changes, or upon death?
Your HSA belongs to you. Whether you switch employers or change health insurance plans, you can continue to utilize your HSA, even if your new plan is not a high deductible policy.
Only spouses can inherit an HSA and use it for medical expenses. The HSA becomes taxable for non-spouse beneficiaries.
A recent Fidelity study shows the average 65-year-old couple retiring now should expect to spend $315,000 on medical costs1. If a high-deductible plan makes sense for you, an HSA can be a great way to ease some of this financial burden. With triple tax advantages it can be a powerful tool for your future. As always, check with your tax advisor regarding your specific situation.
Ben is a Client Service Associate at Rappaport Reiches Capital Management. He is dedicated to providing quality service and support to our clients. Please connect with Ben below. He loves to talk about investing, financial planning and Chicago sports.
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