There are many different account options that can help you build up your nest egg and eventually retire.
But have you ever wondered if any of these retirement accounts that have special, lesser-known abilities?
A Health Savings Account (HSA) is typically used to help pay for future medical expenses. But did you know that you can actually spend that money on non-eligible medical expenses and still get excellent tax benefits?
This is one of the reasons why an HSA can be a sneaky, excellent option for retirement planning.
To teach you what you’ll want to know about HSAs, this article will answer questions including
- What is a health savings account?
- Who is eligible for a health savings account?
- Who can contribute to a health savings account?
- When can contributions be made to a health savings account?
- What happens to the money in my health savings account if I don’t spend it by the end of the year?
- What tax benefits does a health savings account offer?
- Where can I open a health savings account?
- And so much more. . .
Ready to learn if an HSA is right for you?
Let’s get started.
What Is A Health Savings Account?
A health savings account (HSA) is a type of account that was designed to allow you to save and invest your pre-tax money for eligible healthcare expenses.
However, as mentioned earlier, this money does not necessarily have to be used only on medical expenses.
Who Is Eligible For A Health Savings Account?
The IRS stipulates that, in order to qualify for and contribute to an HSA, you must meet the following criteria:
1. Have a High Deductible Health Plan (HDHP)
An HDHP typically has a lower monthly premium so it can appear cheaper than other plans. However, if healthcare expenses arise, you will have to pay more out of pocket before your HDHP will cover some of your healthcare costs because of the HDHP’s higher deductible.
In fact, each year the IRS sets a limit on how low and how high the deductible can be for a plan to qualify as being considered an HDHP.
In year 2023, a plan’s deductible must be no less than $1,500 and no greater than $7,500 for an individual’s coverage and no less than $3,000 and no greater than $15,000 for family coverage.
2. Not Have Any Other Health Care Coverage
The IRS states that, aside from a few less common exceptions, you can’t have any other healthcare coverage – not even Medicare.
But you can still have an HDHP even if your spouse has some other form of healthcare coverage just as long as your spouse’s plan doesn’t cover you.
3. Not Be A Dependent
You can’t be a dependent on someone’s tax return.
Who Can Contribute To A Health Savings Account?
Contributions can be made by both you and also by your employer if you have one.
When Can Contributions Be Made To A Health Savings Account?
This IRS has not yet released official guidance for year 2023, so year 2022 will be used as the most recent information.
Employee/Self-Employed Contributions:
If you work as an employee or you are self-employed, the IRS states that for year 2022 you can contribute to your HSA up until April 15, 2023.
Even if you are not eligible to contribute to an HSA until partway through the above dates, you can contribute to an HSA during the time you are eligible.
Employer Contributions:
The IRS states that if you have an employer then they can also contribute to your HSA.
However, employers are not required to contribute to an employees’ HSA. And if an employer does decide to contribute to your HSA, they must make comparable contributions for all of their employees.
For year, 2022, your employer may make contributions from January 1, 2023 to April 15, 2023. These contributions will be included on your W-2.
How Much Can Be Contributed To A Health Savings Account?
Each year the IRS determines how much an employee (either an individual or a family) and an employer can contribute to an HSA.
In year 2023, the IRS allows an individual person to contribute up $3,850 to an HSA.
A family, defined as two or more people, can contribute up to $7,750.
These contributions limits are combined limits from employee and employer contributions.
In other words, the amount of money that can be contributed by an individual’s HSA in 2023 is $3,850. That $3,850 can be
- Entirely made entirely by someone who is an employee/self-employed
- Entirely made by an employer
- Partly made by an employee and partly made by an employer (e.g. $3,000 contribution by the employee and $850 by an employer)
The same concept applies to a family HSA where the total contribution from the employee and the employer cannot surpass $7,750 for year 2023.
Are There Opportunities To Contribute Even More To A Health Savings Account?
If you are at least 55 years old, the IRS allows you to contribute an additional $1,000 to your HSA.
In other words, this increases the contribution limit in year 2023 for an individual HSA from $3,850 to $4,850 and for a family HSA from $7,750 to $8,750.
What Happens To The Money In My Health Savings Account If I Don’t Spend It By The End Of The Year?
The contributions made to your HSA do not have to be used right away.
That’s because the money in your HSA rolls over at the end of each year, staying in your account until you use it.
In other words, you don’t lose the money in your HSA just because you didn’t spend it by year’s end, which is what can happen with a Health Care Flexible Spending Account.
Will I Need To Take A Required Minimum Distribution At Some Point?
You are not required to take a Required Minimum Distribution (RMD).
That’s right – not only does your HSA balance roll over every year, you also don’t have any RMDs, so you can just let your HSA balance keep on growing.
What Tax Benefits Does A Health Savings Account Offer?
An HSA provides several advantageous tax benefits:
1. Contributions
When you make a contribution to your HSA, the entire contribution is tax deductible.
Just be sure not to exceed your contribution limit.
2. Investing
Much like many other retirement accounts, the money in an HSA doesn’t just have to sit there – it can be invested, allowing it to potentially grow even more.
The gains you make on the money you invest inside of your HSA are tax free.
3. Withdrawals
The tax benefits with withdrawals depends on your age and how you decide to spend the money you withdraw.
a.) If You Are Younger Than 65 Years Old
If you are younger than 65 years of age and you withdraw money from your HSA, you must spend that money on what the IRS deems as qualified medical expenses in order to avoid paying tax on the money you withdrew.
If you do spend the money on non-qualified medical expenses, you will have to pay federal income tax on that money as well as a 20% tax penalty – ouch.
b.) If You Are At Least 65 Years Old
If you are 65 years of age or older, you can still withdraw money from your HSA and spend it on qualified medical expenses. Just like when you were younger than 65 years of age, doing so allows you to avoid paying tax on the money you withdrew.
But now that you are at least 65 years old, you can also decide to spend that money on non-qualified medical expenses and avoid being responsible for a 20% tax penalty. You will still have to pay federal income tax on that money, though.
Overall Tax Benefits:
The HSA offers the unique opportunity of having what is often referred to as a “Triple Tax Advantage,” where money contributed to an HSA receives a tax benefit, gains received from money invested inside of an HSA receive a tax benefit, and money withdrawn from an HSA to be spent on qualified medical expenses receives a tax benefit.
Of course, if you are older than 65 years of age and decide to spend withdrawn HSA money on non-qualified medical expenses you can still enjoy the “Double Tax Advantage” from the tax benefits gained when making contributions and investing. This makes an HSA comparable to a traditional 401(k) or a traditional IRA giving the HSA the commonly used nickname “The Stealth IRA.”
Where Can I Open A Health Savings Account?
Before you can open an HSA, you first have to enroll in an HSA-eligible healthcare plan.
Step 1: Where To Find An HSA-Eligible Plan
If you are working as an employee, you can first ask your employer if they offer an HSA-eligible plan.
You can also find health coverage options that are HSA-eligible through the Health Insurance Marketplace. Make sure the plans you are comparing in the marketplace are actually HSA eligible. Plans that are HSA-eligible should state as such (see picture from the Health Insurance Marketplace below for an example):
You can also find HSA plans outside of the Health Insurance Marketplace at places like banks and health insurance companies, so be sure to shop around to find a plan that might fit your needs best.
Step 2: Where To Open Your HSA
Once you’ve enrolled in an HSA-eligible plan, you can then open an HSA.
Your health insurance carrier may have already automatically opened an HSA for you, so you should find out if that is the case for you.
If not, you can open your HSA at a financial institution of your choosing.
Questions To Consider When Choosing An HSA-Eligible Plan
Here are a few questions to consider when comparing different HSA-eligible plans:
- Is there is a charge to open the HSA account?
- Is there is a monthly charge to keep the HSA account open?
- Is there is a charge to close the HSA account?
- How easy is it to transfer funds from this HSA to another HSA should you chose to change your HSA to another institution?
- What options do you have for making deposits into the HSA account?
- What options do you have for making withdrawals from the HSA account?
- What investment options are offered?
Is The Money In My Health Savings Account Safe?
The Federal Deposit Insurance Corporation (FDIC) is an agency independent of the United States federal government that helps insure those depositing money into bank accounts against potential financial loss should the bank fail. The FDIC was originally created in response to the bank failures during the Great Depression era.
It’s important to note that the FDIC only insures the money actually sitting in your bank account, not money that is invested.
Also, not all financial institutions are FDIC insured, although around 4,000 banks are. You can tell if your bank is FDIC insured because banks that are must have a sign at the teller windows indicating as such.
If your HSA is with an FDIC insured institution and that institution fails, then each of your beneficiaries can receive up to $250,000.
However, if no beneficiary is named and the FDIC insured institution you have your HSA with fails, the FDIC will only insure the HSA up to $250,000. If you have more than one account with that same institution, the FDIC will only insure the total of all of these accounts up to $250,000.
If your HSA is at an institution that is not FDIC insured and that institution fails, you could lose your entire account balance.
What Happens To My Health Savings Account If I Pass Away?
The IRS states that if you pass away and your spouse is your named beneficiary, then your spouse must complete tax form 8889 and take ownership of your HSA.
But if someone other than your spouse is listed as the beneficiary of your HSA, or you don’t have a beneficiary listed, then the HSA stops being an HSA. If a non-spouse beneficiary was listed, then that beneficiary must complete tax form 8889 and will inherit the HSA’s balance but must also pay income tax on that amount.
What Happens to My Health Savings Account If I Change Jobs?
The money in your HSA belongs to you.
If you change jobs, that money is still yours.
Even the money your employer may have contributed remains yours since it automatically vests right after they make their contribution.
Can I Rollover My Health Savings Account Balance To Any Other Type Of Plan?
You can’t roll over the money in your HSA to another type of account.
However, you can change from one HSA provider to another HSA. This can be a useful option if you find that changing HSA providers can allow you to have access to more favorable investment choices.
Final Thoughts. . .
An HSA can be a great retirement account opportunity.
It allows for the potential “Triple Tax Advantage” discussed earlier. Even if you don’t spend your HSA balance on eligible medical expenses, your HSA can still get tax benefits that can make it act like a “Stealth IRA.”
The money in your HSA is also yours, even if you change jobs.
And your HSA balance can continue to grow since it rolls over each year and you don’t have to take RMDs.
But before you decide to open your own HSA, make sure that having an HDHP is right for you. If not, having an HDHP could cost you a lot of money out-of-pocket on medical expenses. You’re typically a better fit for a HDHP if you have few to no expected medical expenses, but even then you never know if something unexpected and costly may arise in the future.
It’s also worth mentioning that the HSA’s contribution limit is quite low compared to some other retirement account options, so it’s probably best to consider your HSA as a supplementary retirement account and still contribute to at least one other type of retirement account as well.
