January 27, 2022

Should You Be Using a Health Savings Account?

Max Martin

Contributing to a health savings account (HSA) can be a powerful retirement savings tool for investors. Created in 2003, HSAs allow individuals with high-deductible health plans (HDHP) to save and pay for medical expenses not reimbursed by their insurance. Annual contributions (currently up to $3,650 for an individual or $7,300 for families) can be invested with no federal taxes on contributions, earnings, or distributions used to pay for qualified medical expenses. Accounts can be funded until age 65, and the HSAs unused balance at the end of the year rolls over into the following year. While HSAs can be a great savings option for retirement medical expenses, they aren’t the best option for all investors. Below are some of the pros and cons of HSAs that all investors should consider.

Pro – Tax advantages

As mentioned above, HSAs offer huge tax advantages to investors. All contributions, earnings, and distributions used for qualified medical expenses are free from federal income tax. This gives investors the opportunity for maximum investment growth which can be especially useful with rising medical costs later in life.

Con – High-deductible health plan requirement

One negative aspect of HSAs is the HDHP requirement that comes with starting an account. While higher deductibles might not matter for investors with typically low medical expenses, an HSA might not be the best option for investors with high medical costs or pre-existing conditions.

Pro – Flexible reimbursement timing

One benefit of HSAs that often gets overlooked is their flexible reimbursement timing. Individuals are not required to reimburse themselves for medical expenses within a set amount of time, meaning that they can wait to reimburse themselves until years after the expense. This can be a worthwhile growth strategy if the individual can afford to hold out on their reimbursements.

Con – Penalties for withdraw

If an individual withdraws from their HSA for a non-medical expense, are subject to a 20% penalty plus income tax. While HSAs offer great tax advantages, if an investor is not in a position that allows them to use their contributions strictly for medical expenses it likely isn’t the best investment option.

Pro - Portability

Money saved in an HSA continues to be available even if an individual changes insurance plans or jobs. HSAs can also be left to a beneficiary, although at that point it does become taxable.

HSAs are an interesting retirement savings option that can give the right investor tax advantages, flexible reimbursements, and portability options. For more information on HSAs and other ways we can help you invest for retirement, visit our website www.kdminvest.com or give Jeff a call at 630-232-9097.