How to Supercharge Your Health Savings

As you grow older, you’ll have more medical expenses, you’ll have more visits doctor, you’ll have more tests, and you may even have more medications to take. All of these medical expenses, even when you have medical insurance will require out-of-pocket expenses.  

What if I told you about a tax advantaged account that may help pay for these out of pocket expenses? What if I told you your employer or a family member can contribute to this account for you? What if I told you could even grow this account and withdraw the funds tax-free? 

Interested? Read on.  

The type of account I am talking about is a Health Savings Account (HSA). 

Benefits of a Health Savings Account

Some of the health savings account benefits include:

• Allowing you to pay for certain out of pocket medical expenses for your spouse and children. 
• Allowing you to deduct the contributions you make to your HSA account on your tax return (even if you do not itemize on your Schedule A). 
• If your employer contributes to your HSA via an employer HSA account, the contributions are not included in your income. 
• Any growth in your account and interest earned is also not taxable. 

For tax year 2020:

• Health savings account limits are $3,550 for an individual account (total of all contributions made by you, employer, or family member). 
• For family accounts, you can contribute a total of $7,100! 
• If you are over the age of 55 before the end of the tax year, you and an eligible spouse can contribute an additional $1,000 each.  

Health Savings Account Requirements

There are certain health savings account rules that you must follow and meet certain requirements to maintain this type of savings account. 

First, you have to qualify as an eligible individual. 

Being an Eligible Individual

First, you need to be covered under a high deductible health plan (HDHP), either as an employee or a self-employed person.  

An HDHP is a certain type of health plan with a higher annual deductible than most health plans. This means you have to pay expenses until a certain limit is reached before your insurance begins to pay.  However, there is is a maximum limit on annual deductible and out of pocket expenses. 

You can put your spouse and any dependent children on your plan and they will be eligible for the family HSA contribution amount.

Also, you cannot have any other health insurance. Your spouse can not cover you on their non-HDHP plan. 

There are exceptions to this rule – you can have disability, dental, vision, and long-term care insurance as well as prescription drug plans. 

You also may not be enrolled in Medicare at all and cannot be claimed on another person’s income tax return. 

To be considered eligible, you must qualify on the first day of the last month of the tax year (at the latest).  For most people, this means December 1^st. 

Finding A Trustee

If you are eligible and have signed up for an HDHP, you’ll then need to find a trustee. A trustee holds your contributions and administers the account. 

Most retirement account administrators will be able to take care of this for you.  Still, you should look at around. Pay attention to the annual fees charged, and determine if the benefits each plan offers are right for you. 

Some HSA accounts will provide you with investment options in your HSA account. 

This means that the funds can be invested in financial products and hopefully grow as you age! If you are relatively healthy when you are young, this can mean a substantial amount in five, ten, or twenty years! 

The gains and distributions will then be tax free. You may also be provided with a debit card for easier payment during your health care visits.  

Funding Your Health Savings Account

Once your HSA account is established you can start to fund it, either through a lump sum or periodic deposits.  

• Each year you, an employer, or family member can contribute to your HSA account (discussed earlier) a certain total each year and a little more if you are over 55 years old. 
• You can continue to contribute for the tax year until the last day of the of the tax filing season (usually in April following the tax year). 

Make sure to only contribute up to the maximum limit available to you and your unique circumstances. 

You can also add to your HSA ccount through – funding from a Traditional or ROTH IRA. 

This contribution to your HSA account is also not included in your income but isn’t deductible in your income tax (as you have already received this benefit from your IRA).  Keep in mind that you can only do this once in your lifetime.  

Investing With Your Funds

Some plans allow you to make investments with the money in your HSA account.  Usually, you can choose from mutual funds, exchange traded funds, and retirement dated funds. 

These investments are beyond what we will discuss here and should be discussed with a licensed professional. You can also speak to a trusted friend or family member who has invested their time to learn about financial investments to get a more objective point of view.  

Withdrawal Rules

The withdrawal rules for HSA accounts are very specific and must be followed.

First, you have to pay for medical expenses until you reach the annual deductible. Once you have met the yearly deductable, the health expenses not paid by HDHP will be eligible for HSA payments. 

You must be careful that you only use the funds in your HSA account for qualified expenses. 

• Many out-of-pocket expenses can be paid for but not all. 
• Some examples of qualified expenses are:
  • Copayments
  • Nursing services
  • Dental expenses
  • Medications requiring a prescription(note that over-the-counter medications are considered qualified if they are prescribed)
  • Insulin
• You must be careful to avoid distributions that are NOT a qualified medical expense. These will be treated as income subject to income tax and an additional 20% penalty!

Make sure to keep documentation and payment records so you can submit it to the HSA trustee for reimbursement. 

Unfortunately, your health insurance premiums are not qualified expenses for your HSA. The only exceptions to this rule are that you can pay for long-term care insurance, COBRA, unemployment coverage, and Medicare and other health coverage if you are over 65 years old. 

The final distribution from your HSA account is, unfortunately, when you pass away. When you pass away, the beneficiary you designated when you opened up your HSA, will receive the account. 

• If the beneficiary is your spouse, the account will be transferred to your spouse as an HSA. 
• If the beneficiary is NOT your spouse, the account’s fair market value will be transferred to this person and counted as income. 
• If the beneficiary is your estate, the value of the HSA will be included on your final tax return.  

(This article is for information purposes only.  You should seek the advice of licensed financial professionals as this article does not constitute financial advice for your unique personal situation.)