Health Savings Account (HSA): A powerful investment tool
Hey y’all! I wanted to share some information on what a Health Savings Account is and how you can use it to help reduce your tax liability and as a retirement savings tool.
What is a Health Savings Account?
A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA. To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements:
You are covered under a high deductible health plan (HDHP) on the first day of the month.
You have no other health coverage except what is permitted under Other health coverage, later.
You aren’t enrolled in Medicare.
You can’t be claimed as a dependent on someone else’s tax return
What are the benefits of an HSA?
You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040). For 2022 the HSA contribution max is $3,650 for self-only or $7,300 for family coverage.
Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
The contributions remain in your account until you use them and it stays with you if you change employers or leave the work force.
The interest or other earnings on the assets in the account are tax free.
Distributions may be tax free if you pay qualified medical expenses.
Once you reach age 65 you can take the funds out and use them for items other than health and not have to pay the additional 20% tax. The distributions will still be taxable so it essentially becomes a traditional IRA.
If you are eligible for a HSA you can max it out and reduce your tax liability. Make sure that within your HSA the funds are being invested instead of just sitting in cash. This will help it grow in value tax-free. If you have a lot of medical expenses currently you may need to use the funds now but if you are relatively health you could pay any co-pays or doctor bills out of your pocket, saving receipts (maybe even an electronic copy), and submitting them at a later date once your money has had time to grow. This option may not be right for everyone so if you have questions please give me a call and we can discuss!
Source: IRS Publication 969