The Mighty HSA

Elizabeth Clough, CFP®, AIF® |

Health Savings Accounts (HSAs) have been growing in popularity over the past few years… but what are they exactly?  How do they work?  Why would you want one?  And does having one make sense for you? 

The short answer is that if you’re eligible, it’s probably a slam dunk to use one.  HSAs are one of my most favorite account types (yep, that was a nerd-alert statement if there ever was one!).  I’m excited to tell you more about them. 

A Health Savings Account is a complementary account to a high-deductible health plan – meaning, you must be enrolled in a high-deductible health plan to be eligible for an HSA. In 2020, a health plan is considered to be high-deductible once the deductible is at least $1400 for an individual and $2800 for a family.  This means that the first $1400 (or $2800) of health care spending for the year is your responsibility, then the insurance policy typically picks up the bulk of the additional costs. 

Most employers who offer high-deductible health plans offer a corresponding HSA, though you have to actively enroll for the account when you pick your benefits.  The money you contribute to the HSA can be taken right from your paycheck, and can be used for your portion of the medical costs as well as approved products such as sunscreen and contact solution.  Contributing directly from your paycheck means you don’t pay income taxes on the money.  What a fantastic benefit!  It really helps your dollars stretch further.  In addition, you don’t pay any taxes on the growth from interest, dividends, or capital gains within the accounts as long as you use the money for health related expenses. 

That’s right my friends, these accounts offer you a triple tax benefit!  It’s no wonder I like them so much.  HSAs are the only account type to offer a benefit when you contribute, a benefit while you hold the account, and a benefit when you use the money for medical expenses. 

In 2020, the most you can set aside into an HSA is $3550 for an individual and $7100 for a family.  As you can see, these amounts are more than the minimum deductible amounts for high-deductible health plans.  Here’s where some strategy comes into play:  at a minimum, you should contribute enough to the HSA to cover any possible health care costs not covered by insurance – that’s just being smart and tax efficient with your money.  However, for those who have enough income to save a little more, I suggest contributing as much as you can and leaving the extra within the HSA to grow over time. 

How is this possible? Health Savings Accounts are incredibly flexible.  Money in an HSA doesn’t expire, or have a use-or-lose provision.  Whatever money you don’t use can be retained in the account from year to year.  It can even be retained, and used, if you switch back to a regular medical plan.  Once you’ve saved the money into an HSA, it’s yours to use on approved health care expenses.  Therefore, the best strategy (for those who have enough money to do it) is to contribute the full amount each year and pay your medical expenses out of pocket.

The key to growing your money over time and making the most of your HSA contributions is to find a custodian offering accounts with investment features.  This allows your money to maintain purchasing power over time, and offers the opportunity for further growth.  Also, the accounts are portable, so if you change jobs you can keep your HSA, and even combine the funds into a new HSA (if the new employer also offers high-deductible health plans). 

Health Savings Accounts can be a really good deal for those who are younger.  If you need the money for medical expenses now, it’s there, but if you don’t need it, you’ll have it to use later when you are older and typically have more medical concerns.  The more money you can build up in the account during your working years, the more you have to use for medical expenses in the future – not a bad idea as we watch health care costs skyrocket. 

Once you’re 65 – even if you’re on a company health plan – you’re no longer able to make contributions to an HSA.  Why? At age 65, Americans are eligible for Medicare.   All the more reason to take advantage of the account while you can!  Once you turn 65 , you’re able to use your HSA for non-medical expenses.  You’ll pay income tax on the distribution but there are no penalties.  Most HSA plans offer several different features for reimbursement – checks, debit cards, or direct deposit into your primary checking account – so after a visit to a provider, you can easily take a distribution to help cover the payment. 

The accounts are so flexible, it makes sense to take as much advantage of them as possible.  Here at Rembert Pendleton Jackson, we’re happy to help clients assess their choices and their circumstances, and to figure out whether a Health Savings Account is right for you. 

The information presented herein represents the opinion of Rembert Pendleton Jackson, and is intended to be general in nature and is not intended to be tax, legal, or investment advice. Rembert Pendleton Jackson, its employees and representatives are not authorized to give tax or legal advice.  Readers interested in the presented subject matter should consult with their personal financial and tax professionals, as there is no substitute for personalized advice.