What You Need To Know About Health Savings Accounts

The Health Savings account, also known as an HSA, is available to those with a high deductible health plan (HDHP).

This is a very versatile account that can be funded pre-tax (often with an employer contributing a certain dollar amount per year), grows tax-deferred and can be

distributed tax-free as long as the money is utilized for qualified medical expenses.

Who is this for?

This is a great option for those in relatively good health and do not expect to have heavy healthcare utilization in the coming year. This is also a great choice for high earners as it provides another avenue for a tax deduction of contributions yearly.

How does it work?

Fort 2024, an HDHP is defined as a plan with a deductible of at least $1600 for an individual or $3200 for a family.

How much can be contributed?

For 2024, an individual can contribute up to $4150, and a family can contribute $8300.

HSA vs FSA (flexible spending account)

The HSA is a portable account and not tied to your employer, unlike an FSA. Another significant difference between these two account is that FSA dollars are typically “use or lose” each year whereas HSA money can be carried over if not used each year. Only $640 from an FSA can be carried over into 2025 whereas the entire balance of an HAS carries over each year.

Investing your HSA

Most plans allow for investment of the money contributed to grow tax-deferred. One strategy for those who can pay out of pocket for medical expenses is to let these investments grow over time and consider future reimbursement as needed for expenses paid. This is a particularly helpful strategy for those with a family and free cash flow to utilize for medical bills each year. Over the course of many years, the amount of money spent on medical expenses should be archived so you will know how much tax-free money is accessible in later years.

What happens at age 65?

When you reach age 65, you may take distribution from your HSA for any reason but they will be subject to ordinary income tax rates. If used for medical expenses, these distributions will continue to be tax free as previously described.

Takeaways and Advantages of the HSA Account

1. Triple Tax Advantage- Contributions made to an HSA are tax-deductible, meaning that the money invested in the account is deducted from the individual’s gross income which helps to lower taxable income. Additionally, the interest and investment gains within the HSA are tax-deferred. Finally, withdrawals from the HSA are tax-free if used for qualified medical expenses. This triple tax advantage makes HSAs a powerful tax planning tool, allowing individuals to save more money and retain more of their hard-earned income.
2. Portable and Flexible- This account will always be yours even if you leave your employer. You can invest as much or as little as you want and change these elections on an ongoing basis
3. Long-Term Investment Growth– The ability to grow these funds for the long-term can be a boost to retirement healthcare savings. Many are under-utilizing the investment capabilities of this account and using them for yearly expenses instead of investing it for long-term growth. We recommend investing as much as possible over and above your deductible to take advantage of the compounding interest when you retire.
4. No time limit on reimbursement of expenses- Reimbursement for medical expenses does not have to occur in the year the expense was incurred. If you have cost documentation for each year you were covered under a HDHP, you could withdraw an amount up to that healthcare expense cost basis from your HSA at a later date for any reason completely tax free! This is an unbeatable way to save more tax-free dollars and has a benefit over and above Roth because the money can be deducted when placed in the account and received tax-free (Roth money is distributed tax free but not tax deductible when contributed).
5. Savings potential- The yearly allowable contribution amount to a health savings account is higher than for individual IRAs, making it a great savings vehicle that provides an opportunity to supercharge your retirement buckets (hello, 4 bucket strategy).

Example: John is 40 years old and is married with two children. He currently has a HDHP and opens an HSA. He funds this at a maximum of $8300 yearly until he retires at 65.

How much will he have in this account at retirement?

Assuming at 7% return, he would have approximately $524,967

Let’s assume he spent approximately $3,000 per year on healthcare for himself and the family over this time period = $75,000

*if John paid out of pocket for these medical expenses then $75,000 of his total amount will be tax free at distribution

Long Term Care Expenses today can easily cost $70,000 per year

Let’s assume a 5% inflation on this for 25 years (when John is now 65 years old) = $237,044.84

Assume that John or his Wife have a long term care event needing 2 years in a facility = $474,089.68

John has the ability to pay for this stay just by utilizing his HSA account alone.

The flexibility of this account allows for him to have peace of mind that his others assets will not need to be drawn down in the event this occurs or to utilize this as a supplement to other retirement income if he never has a long-term care need all while deducting the amounts invested each year and saving tax free money.

I hope you found this helpful as you seek to meet your financial planning goals. If you have questions regarding HSAs please contact us to discuss more.