Health Savings Accounts (HSAs) are not new, but there seem to be a few misconceptions about the unique characteristics of HSAs that prevent people from taking advantage of them. Let’s take another look at HSA accounts and how they might be different than other specialized savings accounts.
HDHP Insurance Plan
First, to take advantage of an HSA, one needs to have what is referred to as a “High Deductible Health Plan (HDHP). In the old days, “high deductible” could mean a $10,000 deductible or more. Nowadays, the IRS defines a high deductible health plan as having a deductible of at least $1400 for an individual or $2800 for a family (for tax year 2020). If you have that, you are well on your way to qualifying for an HSA.
Triple Exempt
HSA contributions, like contributions to other tax protected accounts, are limited in dollar size. 2020 HSA contributions are limited to a maximum of $3550 for individuals and $7100 for families (plus another $1000 “catch-up” contribution for those contributors over 55 years old). Those contributions are First: tax deductible to the owner of the account. Regardless of whether or not you itemize, and regardless of whether or not you max out your IRA, 401k, 403b, etc., your HSA contribution is deductible. Second: the withdrawals are non taxable when used for medical expenses. And third: all the interest and dividends and capital gains within the HSA account accumulate tax free. That’s why many people refer to these as “triple exempt.”
More Bang for the Buck When Using a Credit Card
Many people pay for their medical expenses with a personal credit card (gaining miles or points or rebates) and then reimburse themselves for that medical expense directly from their HSA. It’s a nice way to increase those airline miles when you’re in a Covid related non-travel year!
Healthcare Costs Are Rising Faster Than CPI
Often, inflation figures are used in gauging what future expenses will be during retirement. Right now, in 2020, inflation as measured by CPI is very low. One could reasonably extrapolate low housing, clothing, and food price increases over the coming years. However, healthcare costs are rising far faster than CPI. A great way to save for quickly rising healthcare costs as one moves through retirement is to add to an HSA account.
Spousal Inheritance
Another nice feature of the HSA account is that in the event of the death of the HSA account holder, the HSA account can transfer to the spouse’s HSA account. If the inheritor is a non-spouse, then the account does become taxable upon the death of the account holder.
Too Much Money
For those that end up with too much money in their HSA account (perhaps they have excellent health and zero medical expenses), don’t worry. Once you hit 65 years old, HSA withdrawals for non medical items (like that 75 meter Feadship you had your eye on) are taxable, but they don’t get penalized.
No RMDs
Lastly, there are no Required Minimum Distributions (RMDs) for HSA accounts. That will be one less thing to worry about when you hit age 72 and are faced with IRA RMDs.
Consider the addition of an HSA to your overall savings and estate planning, it may be easier than you ever thought to save on taxes.
