Health Savings Accounts Are Made to Win

Jonathan Baird |

Health Savings Account were created in 2003 by an act of congress, one of the few good ones in recent memory, to help Americans cope with increasing medical costs. Over the years, they have been expanded and the benefits have increased substantially. Health Savings Accounts (HSAs) are available for those who have High Deductible Health Plans (HDHPs) and enable owners to make tax-deductible contributions to the account; and when reimbursing the owner for qualified medical expenses, the withdrawals are tax-free as well.

Unfortunately you can’t just go open an HSA and reap the benefits of the tax savings because there are some qualifications. HSAs are one of the best savings vehicles available today. In order to open an HSA you must have a qualifying insurance plan. These plans have high deductibles and lower premiums. The effect of these plans for the individual is that the out of pocket expenses are higher, but the premiums are lower. In order to determine if your plan qualifies you should ask your insurer. In addition to the HDHP requirement, you must have a Social Security Number, a primary residence in the U.S. and you cannot be covered by certain other supplemental health plans.

As much as I’d like to tell you that there are no contribution limits to these accounts, unfortunately, the politicians want to limit our fun. The 2020 yearly limits for contributing to HSAs are $3,550 for single plans and $7,100 for family plans. Account holders over the age of 55 can make an additional $1,000 catch-up contribution. You can reimburse yourself for expenses incurred at any time after establishing the HSA. The institution holding the funds is not responsible for ensuring that your withdrawals are qualified, so it is important to keep good records of what you reimburse yourself for, or what you spend the money on directly in the event that you are audited.

For many account holders, the use of these accounts will be to deduct your regular health related expenses. You can make contributions to the account as needed throughout the year and then either reimburse yourself for your expenses or pay for your health expenses directly from your account. The HSA is the most tax efficient way to save money since the money going in is tax deductible as well as when it comes out for qualifying health related expenses. As an example, if you have a procedure that costs $1,000, you could deposit the money into your HSA and then pay for the procedure out of your account. By paying through the HSA you get to deduct the $1,000 on your taxes. This could save you hundreds of dollars depending on your marginal tax bracket.

If you want to indulge completely in the magic of tax savings possible with these accounts, the best way to use HSAs would be to fully fund your HSA every year, and never spend any money out of the account. In addition to building up a large cash balance to cover large health expenses later on, you can invest cash above a nominal amount in the market. This strategy will allow you to take advantage of the massive growth possible in the stock market and could create a very substantial nest egg to help you cover your health expenses in retirement. A very important part of this strategy is to keep up with all of your health related expenses. Once the HSA is established, you can keep up with all of your expenses and then reimburse yourself at any time for those expenses. Hypothetically, you could save $7,100 per year from the time you are 40 until you retire at 65. If you never spent the money and you made 8% on the invested funds you could grow the account to over half a million dollars! Talk about winning!

There is a lot of nuance to these accounts as far as who qualifies and how to effectively use them to the fullest extent, be sure and consult with your tax planner and your insurance person to make sure you follow the rules and execute the plan effectively.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.