As you know healthcare costs can become incredibly expensive. Between doctor visits, prescriptions, and dentists, bills may start to pile up. You might have heard of an account called a Health Savings Account (HSA), but what exactly is it?
HSA Explained
In short, an HSA is a type of savings account that allows you to set money aside for health-related expenses. These expenses can range anywhere from AA meetings, doctor visits, even band aids. However, this is only available to you if you are covered by a high-deductible health plan (HDHP).
Benefits of an HSA
The money you contribute to your HSA is triple-tax-leveraged. This means tax deductible, tax free on qualified health expenses, and tax-deferred. In other words, you can choose to invest the money and let it grow for your future without having to pay taxes when using it on qualified expenses.
One other extremely powerful benefit of an HSA is the option to reimburse yourself tax-free in future years. Let’s say you were out on the lake and ended up with a broken arm. Hypothetically, this surgery will cost $5,000. You have two options: either pay for this out of pocket or use your HSA. If you choose to pay out of pocket and reimburse yourself down the road, you will benefit much more from all three tax advantages. But remember, if you can’t afford healthcare out of pocket, it is okay to use the funds in your account.
Lastly, there is always a use to an HSA. The most common argument I receive is, “I am healthy, and don’t see myself needing money from a health account.” If you like paying taxes, and hate having tax free money, then you are right, you shouldn’t have an HSA, but if you do like saving money, there is one final perk. At age 65, your HSA has no spending restrictions. This means you can use the money in any way you would like; however, you must pay taxes on the growth in the account like you would with a 401(k). Keep in mind, that doesn’t mean you lose access to tax-free spending on qualified expenses. That perk will always be there, you just have increased flexibility of funds after you turn 65.
Record Keeping tips
Without proper record keeping, you could land yourself in a lot of trouble with the IRS. Every expense made with the intent of using your HSA either now, or in the future should be documented. This can be done through actual copies, spreadsheets, or keeping track online. Whichever method you choose, stay consistent and keep records of your purchases. The likelihood of going through an audit is low but not impossible.
Contribution Limit
The next thing you need to know is how much you can contribute. For 2023, the limit is $3,850 a year as a single account holder, or $7,750 for a family.
At first glance it may not seem like a ton of savings but let’s do the math for a family living in Idaho in the 24% tax bracket:
24% = Federal Taxes
6% = Idaho State Tax
7.65% = FICA Tax (if deducting directly from your paychecks)
By contributing to their HSA, this family could potentially save 30% - 37.65% in taxes or approximately $2,325 - $2,918. Obviously the higher your tax bracket, the more you save. So, not only do you save on taxes now, but you’re also not paying taxes on the growth of your investments. It’s like the hybrid version of an IRA and Roth IRA!
HSAs are one my favorite planning tools because of their flexibility. The money is always yours, so even if your employer is making contributions, there is no vesting period on when that money transfers to you. If you are eligible for a plan, I highly recommend that you look further into opening up an HSA and start by making contributions today!
Five Pine Wealth Management is a registered investment advisor offering advisory services in the State(s) of Idaho and Washington and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
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