If you qualify, one of the best gifts the IRS gives consumers is the Health Savings Account or HSA for short. They’re what I’d call a “triple-whammy”: savers use pre-tax money to fund them (lowering your income tax bill in the year you made a contribution), they grow tax-deferred (you don’t need to pay for the growth or income earned every year) and you can take out distributions to pay for eligible medical expenses tax-free. What a deal!
Not everyone will qualify, but if you’re one of many individuals or families that have what’s called a “high deductible health plan”, you’re in luck. The deductibles and “out-of-pocket” limits change every year, but in 2023, a “high deductible” is defined as an insurance plan with a deductible of $1,500 for an individual or $3,000 for a family. Also important to note is that these plans can’t exceed an out-of-pocket cost for the individual of $7,500 or $15,000 for a family. Deal-breakers are having other health coverage, being enrolled in Medicare or being claimed as a dependent on someone else’s tax return. If all this sounds like you, you’re eligible for an HSA, plain and simple.
Every year, the amount of allowed contributions to your account changes. For 2023, an individual can set aside $3,850 and a family can put away $7,750. In 2024, those limits go up to $4,150 for an individual and $8,300 for a family. Just like an IRA, Uncle Sam allows for a “catch-up contribution” of $1,000 a year to “juice” your balance at age 55 and above until you hit 65 and become eligible for Medicare. Also like an IRA, you have up until tax day in April of the following year to make contributions for the preceding year. As an example, 2023 might me a tight year for Mary and she is not able to contribute to her HSA. If she receives a bonus or another windfall in early 2024, she could contribute a total of $7,700 before April 15, 2024 to her account: $3,850 for tax year 2023 and $4,150 for tax year 2024. If Mary is 55 or older, she could potentially tack on a further $1,000 for each tax year.
We all know that even with health insurance, there are plenty of out-of-pocket expenses that can really add up. These are the kinds of things for which HSA distributions can pay. Deductibles, co-pays, out-of-pocket prescription costs, dental and vision costs and psychiatric or behavioral health bills that are not covered under your medical plan…these are the items for which you can use your HSA. You can’t pay for your medical plan premiums with your HSA, but if you are unemployed and are paying COBRA premiums, that would be an eligible expense. Also not allowed is Medicare supplement premiums, but the premium for Medicare Part B (if you’re not yet taking social security benefits and are being sent a bill by Medicare) would be allowable. Long-term care premiums are also an eligible expense.
Sound too good to be true? There are a few rules about taking distributions of which you need to know. If you need to access the funds from your account before age 65 to pay for non-qualified expenses, you’ll pay tax on the amount of the distribution and a 20% penalty. The rule is a little different if you’re over 65 years of age. If so, you can take a distribution for a reason other than a covered medical expense, but you’ll pay taxes on the amount at your current tax rate. Your best bet is having an emergency fund from where you can draw money for unexpected expenses and leave the HSA for medical expenses only. Also important to know is that there’s no “use it or lose it” clause with Health Savings Accounts. Balances roll over from year to year and can keep growing. If you have an HSA with your employer, you can take it with you if you change employers by bringing it to your new employer if they sponsor Health Savings Accounts or transfer it to your financial advisor or a discount investment firm.
Would you like to learn more about HSAs or go a step further and open one to start taking advantage of one of the best gifts the IRS gives us today? I’d be honored to be of assistance. Please reach out to [email protected] or call 563-949-4705.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.