Brittany Falkner
Wealth Manager
Health Savings Accounts, otherwise known as HSAs or (HS “yay”s if you are a tax nerd like me) are one of the most underutilized account types that I have seen in practice. While these accounts are only available to individuals with high-deductible health plans, I often see clients completely missing the benefits that these accounts can provide. Below, we’ll go over why you should love these accounts and some best practices to make the most of these tax-advantaged accounts.
What is an HSA?
Health Savings Accounts let you set aside money on a pre-tax basis with all withdrawals being tax-free when used for qualified medical expenses .1 This means you can direct a portion of your wages toward this account and never pay tax on these dollars (assuming all withdrawals are for qualified medical expenses). When invested, the growth within the account is also tax-free! There are no other savings vehicles that have such glorious tax benefits, which makes HSAs known as triple tax-advantaged (money goes in tax free, grows tax free, and can come out tax free). To put the cherry on top, these accounts have no income limits, so high income earners are eligible to contribute (many other savings options have income limits, such as an IRA contribution).
You are eligible to contribute to a health savings account if you are enrolled in a high deductible health plan. For 2023, you have a high deductible health plan (HDHP) if your deductible is at least $1,500 single ($3,000 family) and your maximum out-of-pocket is no more than $7,500 single ($15,000 family). If that is true, you are eligible to contribute $3,850 if insured under single coverage ($7,750 family) to an HSA account. If you are over the age of 55, you may contribute an additional $1,000 per year. As a friendly reminder, unfortunately you are not eligible to contribute to an HSA once you are on Medicare.
Be sure to tell your tax preparer about any contribution you make and keep all medical receipts in your records. You may use this account to pay for qualified medical expenses for yourself, your spouse, and any dependent you claim on your tax return.
Best Practices & Hot Tips for HSAs
The secret sauce to fully utilizing this tax haven of an account would be to contribute the maximum you can each year, invest the dollars, and to let the account grow until retirement or later. Most retirees are hit with the largest healthcare expenses later in life and that is when this account can really come in handy. By delaying the use of these funds, you are also maximizing the amount of tax-free investment growth! If you have been thinking of this account as a medical checking account you aren’t wrong, but I would encourage you to view this account as a retirement savings vehicle that has great tax advantages.
Another hot tip to consider is that there is no time limit for reimbursing yourself for medical expenses. This means if you save your medical receipts throughout the years, you can reimburse yourself from your HSA account at any future point for past expenses, tax-free. To do so, you will need to keep meticulous records, ensure you were enrolled in a HDHP in the year the expense occurred, and ensure you did not claim a medical deduction for that expense on your tax return. If you are concerned about passing away with this pot of money, the good news is that HSA accounts allow for beneficiary designations. If you pass this account to your spouse after your death, your spouse will receive the same tax benefits, tax-free growth and withdrawals when used for medical.
To ensure you are maximizing this account, you will want to pay close attention to the HSA contribution limits each year. The contribution limits increase with inflation each year with the most recent increase being an astonishing 7% for 2024. For 2024, the contribution limits increase to $4,150 single ($8,300 family). Further, once you and your spouse are both over the age of 55, you are each eligible to contribute the additional $1,000 contribution. To keep the IRS happy, each spouse would need their own HSA account and the additional $1,000 would need to be deposited into their respective accounts. This provides a fantastic opportunity to super fund these accounts for those nearing retirement.
Lastly, you are eligible to contribute to an HSA account until April 15th of the following year for the current year, assuming you had a HDHP for the entirety of the previous year. This could come in handy if you forgot to max out the account, if you need additional tax savings on your return, or for additional tax planning purposes.
Final Thoughts
At Boardwalk Financial Strategies, we are a team of advisors with extensive tax backgrounds. This allows us to build comprehensive financial plans for our clients utilizing the above tax saving strategy and more. If you would like to learn more about our comprehensive wealth management services, please contact us today.
1 To see the full list of qualified medical expenses, please see the IRS Publication 502.
