What is a Health Savings Account?

By Hightower Westchester on October 3, 2022

When creating a comprehensive financial plan, there are a number of strategies that can help you achieve your goals, but today we’re focusing on a Health Savings Account (HSA).  One of the more under-utilized savings strategies available.  This type of account has many features that play into your health and financial well-being and can be an important part in the overall financial planning process.

So, what exactly is an HSA? An HSA is a savings account that is funded with pre-tax dollars which can be used for qualified medical expenses.  In order to be eligible for an HSA, you have to be enrolled in a high-deductible health plan (HDHP), have no other health coverage, are not enrolled in Medicare, and you’re not claimed as a dependent on someone else’s tax return. 

Because your contributions are made with pre-tax dollars, you won’t pay tax on that money and the earnings in the account will grow tax free.  The contribution limits for 2022 are $3,650 for an individual and $7,300 for a family.  If the participant is over 55, there is also a $1,000 catch-up provision for a total of $4,650 for that individual. ¹

An HSA has similar characteristics as both a traditional and Roth IRA.  Like an IRA, once opened and funded, the HSA account is tax deductible. The funds can be invested in various mutual funds and grow tax-deferred. In addition, contributions can be made by your employer which may be excluded from your gross income. The money, if utilized for qualified medical expenses, comes out tax-free like a Roth IRA. 

At the end of the year, the funds in your HSA roll over if you don’t spend them, so you won’t forfeit them like you would with unused funds in a flexible spending account (FSA).  One important thing to know about HSA’s is that if you take money out for something that is not a qualified medical expense prior to the age of 65, you will have to pay a 20% penalty as well as income tax on the amount withdrawn.  If you’re older than 65, you can use the money for any expense, it does NOT have to be for a medical expense, but you will have to pay income tax on the amount withdrawn.

There are some additionally benefits of an HSA to keep in mind. Because it’s a savings account that’s in your name, you can still use it for qualified medical expenses if you change health plans or employers. If you retire, and are age 65+, you are no longer able to contribute to your HSA, but you can use the funds in your HSA to pay for qualified medical expenses (such as Medicare premiums and copays), tax-free.

As with everything, you have to weigh the pros and the cons.  As mentioned earlier, in order to be eligible for an HSA, you have to be enrolled in a high-deductible health plan. Generally, with an HDHP your monthly premiums will be lower, but as it’s a high-deductible plan, you’ll have to pay more out-of-pocket until your health insurance starts paying.  Another thing to keep in mind when considering an HSA is the need for good record-keeping. In case of an audit, you’ll need to keep the receipts for all your withdrawals to prove that they were indeed used for qualified health expenses.    

One study by Fidelity Investments, which manages retirement accounts and HSAs, states a 65-year-old couple retiring this year can expect to spend an average of $315,000 in health care and medical expenses throughout retirement, even when enrolled in Medicare.² This does not factor in Long-Term Care which could certainly double this amount.  Using an HSA is an effective strategy to protect one’s health and at the same time create a potential retirement account that can be an important planning asset.

Like all investments, one should have the appropriate guidance to help in the investment process and picking the most risk-adjusted portfolios. Make sure this account compliments the overall financial plan as these funds could become a significant part of the overall picture.

Roman Ciosek – Managing Director, Partner – Hightower Westchester

914.825.8633 – rciosek@hightoweradvisors.com

¹ https://www.healthcare.gov/glossary/health-savings-account-hsa/

² https://money.com/healthcare-costs-retirement-fidelity-study-2022/