The value of a Health Savings Account, or HSA, can be easily overlooked or misunderstood. It is a relatively new type of account that can be helpful to those with ongoing medical expenses and to those that wish to plan for unexpected medical expenses. This type of account provides tax-sheltered savings with the potential for long-term growth.
For 2021, the maximum contribution limit for an HSA is $3,600 for singles and $7,200 for families, according to the IRS. With healthcare costs on the rise and potentially increasing medical expenses as we get older, an HSA can help such expenses and can even provide funds for retirement or be used to pay for Medicare premiums. For those who participate in a high deductible medical plan, there are several benefits to having an HSA.
When you make contributions to your HSA via your paycheck, the contributions are tax-deductible. Withdrawals are tax-free when used to pay for medical expenses. You also may invest the unused money in an HSA, providing the opportunity to build tax-free wealth. Any unused money at the end of the year rolls over into the next year and is yours indefinitely.
With an HSA, you can pay yourself back anytime, even for expenses incurred in prior years. Given this flexibility, it can be a good idea to keep track of medical expenses in a spreadsheet and keep receipts to be able to track your tax-free reimbursements. Qualified medical expenses include over-the-counter medicine, office visits, medical alert bracelets, and more. Also, you do not lose the money if you change jobs like in a Flexible Spending Account or FSA.
An HSA can also potentially offer “free money”. Many employers offer matching contributions or a lump sum amount per year for allocating money to an HSA. Although these contributions may count toward the annual limit established by the IRS, this extra money can be helpful, whether you’re needing it for medical expenses or choose to invest it. In 2019, the average employer contribution was $880, which increased over the prior years.
To be eligible for an HSA, you must also be enrolled in a high-deductible health plan. Although such plans have lower premiums, which means you’ll pay less per month, the required expense when you go to the doctor is higher. High-deductible plans do not start paying until you’ve reached medical expenses at a certain amount. The drawback is though, that if you take money out of an HSA prior to age 65 for non-medical expenses, the distribution would be taxed and incur a penalty from the IRS.
An HSA can be great for any age, but is ideal for millennials, given potentially fewer doctor visits and longer investment time frames. However, the danger is that the money in the account will be used for various expenses and depleted each year, rather than allowing any unused money to be invested and grow. Allocating as much as possible to this account each year and allowing it to remain invested is a large benefit, especially to millennials, with the tax advantages and decades to allow for growth.
Health Savings Accounts can raise questions and it is important to allocate the correct amount for your overall needs every year. It is always beneficial to seek professional guidance for how this type of account may fit into your overall financial plan. Please schedule an appointment on Bayntree’s online calendar by selecting the date and time that is most convenient for you! You can also always reach us by emailing info@bayntree.com.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning, and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.
