Health Savings Accounts: What You Need to Know

Oct 15, 2020

Welcome back to our series on health insurance! If you missed our first blog, you can find it here. Today, we are discussing health savings accounts. If you have a high deductible health plan (HDHP), then you will be eligible for a Health Savings Account (HSA). While you often run across information on how 401k plans and IRA accounts can help save on taxes, the HSA account takes it to the next level! Not only are your contributions tax-deductible, but qualifying withdrawals are also tax-free.

Let’s Talk Contributions

Contribution limits to a Health Savings Account are based on your healthcare coverage plan type. In 2020, the IRS has a $3,550 contribution limit for self-only coverage, or a $7,100 limit for family coverage.

The deadline for contributing to an HSA is your tax-filing deadline. This means that you have until April 15th of 2021 to make a 2020 contribution. If you have not maxed out your contributions, you may receive a call from your tax preparer. They’ll let you know that you still have room to put more money toward the plan. You can simply write a check into the account because an HSA does not have to be funded from payroll contributions.

Health Savings Accounts and Withdrawls

To take money out of an HSA without paying tax on it, you must have a qualifying healthcare expense to pair against the withdrawal (see IRS Publication 502 for a list of expenses).

Likewise, it’s important to note that you do not have to use an expense in the year it was incurred. For example, if you paid $1,000 for a root canal in 2018 and did not take it out of your HSA, you can keep the receipt and use it in 2025 to draw out $1,000 from your HSA tax-free. There is no time-limit on when an expense must be used. Of course, with inflation decreasing the value of your dollars over time, it makes sense to use the expense sooner than later.

The Investing Benefit of a Health Savings Account

The main reason the HSA is such a great account is that you can invest money that you contribute which allows it to grow and then be used in the future with zero tax liability. This is the only account type that has: tax deductible contributions, tax-deferred growth, and tax-free withdrawals. It is the best deal the IRS gives you.

Passing it On

The one downside to an HSA is that it is not tax-friendly for your beneficiaries. For a non-spouse beneficiary, the HSA in its entirety becomes taxable in the year of death. This means that you should plan on using as much of the HSA as possible prior to death.

If you have an HSA, I hope you are now planning how to maximize your contributions toward it. Healthcare expenses are almost certain. Planning out how you can pay for them ahead of time can make a huge difference to, not only your financial position, but your quality of life as well.

If you need help evaluating your options, call us today!