Maximizing Health Savings Strategies
Are you taking advantage of triple tax benefits? If you are enrolled in a qualifying high-deductible health plan (HDHP), not claimed as a dependent on someone else’s tax return, and not covered by another non-high-deductible health insurance plan, you may be eligible to contribute to a Health Savings Account, or HSA. HSAs are known for their “triple tax benefits” with pre-tax contributions, tax-deferred growth, and tax-free withdrawals for qualifying medical expenses. Both short-term savings and long-term growth can be achieved by smart HSA strategies.
Contributions
Contrary to other types of medical savings accounts, HSA contributions do not have a “use it or lose it” rule; savings stay with you year-to-year, even when you change jobs or become ineligible to contribute. In 2024, a covered individual can contribute $4,150 to their HSA, while covered families can contribute up to $8,300. If you are 55 or older, an additional $1,000 catch-up contribution is available per individual. Have you started a new job and/or obtained HSA eligibility mid-year? As long as you are eligible by December 1st of the year and plan to keep eligibility through the following year, you qualify for a full year’s contribution. Maybe you have a child under age 26 who is still on your insurance, but files their own tax return. A non-dependent child covered under a qualifying family HDHP can contribute up to a separate family limit of $8,300 to their own HSA. Talk about savings! Most often contributions come from payroll deductions, but cash contributions can also be added up to the tax-filing deadline. Be sure you take advantage of an HSA employer match if available, as this is “free money” to you.
Distributions
To receive the advantageous tax benefits, HSA funds must be withdrawn for qualified medical expenses. Common expenses include hospital visits, medical deductibles or copays, drug prescriptions, prescription eyeglasses, or dental work. The list is quite exhaustive, also including common over-the-counter medicines, certain long-term care insurance premiums, and some travel expenses for necessary medical treatment. Funds can be used for the benefit of the HSA owner, spouse, or dependent. Qualified expenses may be paid directly from the HSA. Alternatively, with proper receipts and records, the HSA can reimburse you for any expense incurred after the account was established.
Non-qualified expenses paid from an HSA incur tax and a penalty. Once the owner reaches age 65, taxes apply but the penalty is waived.
Strategies
For minimal, but favorable, tax benefits, contributions are kept in cash and used for medical expenses throughout the year. This strategy treats the HSA like a tax-advantaged bank account. To boost tax-free growth for retirement health expenses, the HSA could alternatively act like an IRA. The maximum contribution is added each year, and funds are invested in the market to grow until retirement. Many people may find a happy medium, where a few years’ medical savings can be set aside in cash and the remainder invested for growth potential. Health care is one of the largest expenses retirees must plan for; keeping this long-term perspective will allow you to reap benefits down the road.
Knowing the rules and deciding the best strategy for your cash flow are both crucial to maximizing your savings through an HSA. Work with a CERTIFIED FINANCIAL PLANNER™ professional to see how you could be taking advantage of triple tax benefits.
Published in the Victoria Advocate.
Sarah D. Nix is a CFP® professional and Associate Advisor with Keller Wealth Advisors.
