“The Importance of a Health Savings Account”

If the last few months are any indication, we can see that healthcare needs and associated expenses are truly an unknown quantity.  Healthcare costs can be a major stumbling block for both the young and elderly and finding tax efficient ways to combat these costs should be a priority.  That is where the Health Savings Account (commonly referred to as an HSA) becomes so important.   Sure, health insurance and Medicare are the first line of defense when it comes to offsetting the cost of care, but many expenses either don’t qualify for coverage or exceed the maximum benefits.  In this post, we outline how an HSA works and why you should consider investing in one with an eligible insurance plan.   Some HSA Background Since their inception in 2004, the interest in Health Savings Accounts (HSA’s) has surged and estimates now show roughly 25 million HSA accounts exist across the United States.  However, even with this growing interest and participation, many people are still left wondering what an HSA is and what benefits it can provide them.  In short, an HSA account is a government regulated savings account that allows you to set aside pre-tax income to cover health care expenses that are not normally covered by your insurance.  Usually, HSA’s are only available to people in a qualified high deductible health plan (HDHP) and the definition of “high deductible” varies from state to state.  If you are currently covered by a group insurance plan and you aren’t sure whether it is HSA eligible you can check with your benefits department or read more about the details here.   What is an HSA invested in? An HSA provider will usually provide a suite of investment options such as mutual funds, ETF’s, and even individual stocks and bonds.  Since the account is yours personally, you have complete control over how your money is invested.  We strongly encourage our clients to have diversification across their HSA account and treat it like their other investments.  You want your account to grow, but you always want to protect against market fluctuations as much as possible since healthcare costs can crop up at any moment.   How Much can I contribute to an HSA? For 2020, the most you can contribute to your HSA account is $3,550 for individuals and $7,100 for families.  If you’re over 55 years old, you are allowed an additional $1,000 as a catch-up contribution.  Assuming other investments and retirement accounts are fully contributed to, then an HSA account can be another great savings alternative.   How are HSA’s treated for tax purposes? This is probably the most beneficial aspect of an HSA account.  First, when you invest money into an HSA account it is tax deductible, meaning you do not pay taxes on these funds.  Second, as the money grows inside the HSA it also avoids taxes from capital gains or dividends that it earns.  Third, if you withdraw the funds inside your HSA for medical purposes it is a tax-free withdrawal!  This triple tax benefit is unheard of within the financial world and can make HSA’s a great vehicle to save for future medical expenses.  Additionally, if you end up not needing this money for medical expenses by the time you are 65 then you can pull out the funds without penalty.  You will pay taxes on those withdrawals but in that sense, it would be treated just like your 401K or Traditional IRA account. If you have further questions about HSA accounts or simply want to speak to a financial professional, then reach out to one of our advisors for a free introductory call!