HOW DO HSAS WORK?
Ricky Biel, CRPC®
Founder of Affluent Professional Networking Group, Providing Alternative Investment Advice to Accredited Investors
Health savings accounts (HSAs) are a convenient tool for people who have high-deductible health insurance plans (HDHPs). An HSA works as a tax-advantaged savings account, meaning you can make tax-free contributions to it each year up to a certain amount and use those funds to pay medical expenses. If you don’t need to use the HSA for health expenses, then the savings account can be used as an interest-bearing investment. (1)
At Haydel, Biel & Associates, we want you to understand the benefits and disadvantages of opening an HSA so you can make the right choice about whether this works for you.
HSA BENEFITS
One of the strongest arguments for opening up an HSA is it allows you to lower your federal income taxes by making tax-free deposits into your account. The contributions can be deducted pre-tax from payroll or deducted from your income on your tax return. Contributions can be made by yourself or your employer, and if your employer does choose to invest in an HSA for you, the money is not taxed as income for the employee. (2)
Depending on the account, some HSAs also invest the money you contribute in mutual funds, ETFs, or other stocks. The earnings that you make from the HSA are also tax-free as long as you withdraw the funds to pay for medical expenses. (3)
HOW MUCH CAN YOU CONTRIBUTE?
As of 2021, an individual who has an HSA can contribute up to $3,600 per year and $7,200 for family coverage. Individuals who are over the age of 55 can make additional catch-up contributions in the amount of $1,000 per year to their HSAs.
Of course, you can only have an HSA if you have a high-deductible health plan. The HDHP minimum deductibles are $1,400 for individuals and $2,800 for families in 2021. The HDHP maximum out-of-pocket costs for 2021 are $7,000 for individuals and $14,000 for families. (4)
HSA WITHDRAWALS
You can use the money you deposit in your HSA to pay for medical expenses before you meet your deductible on your HDHP. Such medical expenses include the usual healthcare costs, such as deductibles, copayments, and vision and dental expenses. But you can also use it to pay for non-traditional medical costs, such as acupuncture or chiropractic visits. Additionally, you can use the account to cover medical costs for your immediate family members or spouse even if they are not under your HDHP. (5)
One of the most beneficial attributes about this HSA is that the funds roll over from year to year, which means that these tax-free funds can grow with interest for many years. Once you reach the age of 65, you can withdraw the funds without a penalty and use them on non-medical expenses; however, you will pay income tax on these funds if you are using them for non-medical expenses. If you are enrolled in Medicare, you can use HSA funds to pay for Medicare premiums for Part B, Part D, and Part C. (6)
POTENTIAL DISADVANTAGES OF HSAS
There are many advantages that HSAs offer, but they do not make sense for every family and every situation. Critics will tell you that HSAs work well for young and healthy people but may not work as well for people who are older and ill.
It goes without saying that illness can be unpredictable and, therefore, it can be hard to budget for healthcare expenses. And some people also find it hard to save the correct amount in their HSA. Also, it is worth noting that you cannot use HSAs to cover Medigap premiums without paying taxes. (7)
WE’RE HERE TO HELP
In general, if you are nearing retirement, an HSA is something you should consider, as HSAs can be a useful tool to offset any medical costs you may incur in retirement.
Do you have questions about whether an HSA is right for you and your family? We can help.
Contact us at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.
ABOUT HAYDEL, BIEL & ASSOCIATES
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.
The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Haydel Biel & Associates or performance returns of any Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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(1) https://www.healthcare.gov/glossary/health-savings-account-hsa/
(2) https://www.healthinsurance.org/faqs/how-does-a-health-savings-account-hsa-work/
(3) https://www.fidelity.com/viewpoints/wealth-management/hsas-and-your-retirement
(4) https://www.irs.gov/publications/p969