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Health Savings Accounts - Is it right for you? Thumbnail

Health Savings Accounts - Is it right for you?

Insurance Planning Retirement Planning

It's no surprise to hear that Healthcare costs continue to rise and can potentially be the most significant cost to individuals and families upon retirement.  Therefore, people are looking for ways to manage their healthcare expenses more effectively and plan for higher costs in retirement. Health Savings Accounts (HSAs) offer a way to do just that.  HSA’s have gained in popularity over the years because of its potential tax advantages and flexibility. However, like any financial instrument, HSAs have their pros and cons. In this article, we will explore the advantages and disadvantages of HSAs in order to help you make an informed decision about whether an HSA is the right choice for your healthcare and financial needs.


What are Health Savings Accounts (HSA)?

An HSA type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs. HSA funds generally may not be used to pay premiums.

While you can use the funds in an HSA at any time to pay for qualified medical expenses, it is important to note that you may contribute to an HSA only if you have a High Deductible Health Plan (HDHP).  For plan year 2023, this means that with this type of health plan, your insurance company will not cover the cost of any coverage until you have paid the first $1,500 if you are single or $3,000 if you are a family.

For 2023, if you have an HDHP, you can contribute up to $3,850 for self-only coverage and up to $7,750 for family coverage into an HSA. HSA funds roll over year to year if you do not spend them. An HSA may earn interest or other earnings, which are not taxable.

After the age of 65, HSA funds operates just like an Individual Retirement Account (IRA) and the funds can be used for any type of expense penalty free.


Advantages of Health Savings Accounts (HSAs)


1.    Tax Advantages: 

One of the significant benefits of HSAs is the potential to receive a triple tax advantage. Contributions made to an HSA are tax-deductible (regardless of income level), reducing your taxable income. In addition, the earnings on the account grow tax-free, and qualified withdrawals for medical expenses are also tax-free. This triple tax advantage can result in substantial savings, which makes HSAs an attractive option for you if you are seeking to minimize your tax burden.


2.    Savings and Investment Growth: 

HSAs allow individuals with another way to save money for retirement. Unlike other healthcare accounts, such as Flexible Spending Accounts (FSAs), HSAs do not have a use-it-or-lose-it policy. Any unused funds in your HSA can be carried over from year to year, allowing your savings to grow. Furthermore, many HSA providers offer a wide assortment of investment options (like an IRA), which can potentially increase the value of your account over the long term.


3.    Flexibility in Spending: 

HSA provides flexibility in how the funds are spent. You can use the money in your HSA to pay for many types of qualified medical expenses, including deductibles, copayments, prescription medications, dental and vision care, certain alternative therapies, etc.  After the age of 65, the money in your HSA account is treated like an IRA and the money in the account can be used for any purpose whatsoever.


4.    No Required Minimum Distributions (RMDs):

Unlike an IRA where it is mandatory that distributions be taken starting at age 73, there is no such requirement for an HSA.  You can keep the funds in your HSA as long as you like and only withdraw the funds when you need it for medical or other reasons.  If there are funds in the account upon death, the HSA can be passed to your beneficiary.  They than can use the funds in the HSA for their own healthcare needs.


5.    You Can Take It With You: 

HSAs are not tied to a specific employer, meaning you can keep your HSA even if you change jobs or retire. This portability allows you to continue contributing to your account and using the funds for qualified medical expenses.


Disadvantages of Health Savings Accounts (HSAs)


1.    High-Deductible Health Plan (HDHP) Requirement: 

To open an HSA, you must have a qualifying high-deductible health insurance plan (HDHP). HDHPs typically have higher deductibles and out-of-pocket expenses compared to traditional health insurance plans. This requirement may be a disadvantage for you if you anticipate significant healthcare expenses or prefer lower out-of-pocket costs throughout the year.


2.    Limited Contribution Limits: 

HSAs have annual contribution limits set by the IRS. While these limits are adjusted each year, they may not be sufficient for you if you currently have significant healthcare needs or anticipate significant healthcare needs in the future. In 2023, the annual contribution limit for an individual with self-only coverage is $3,650, and for those with family coverage, it is $7,300. If your annual medical expenses exceed the amount of your contributions , you may find these limits restrictive.


3.    Withdrawal Penalties: 

While HSAs offer tax advantages, non-qualified withdrawals from the account may be subject to taxes and penalties. If you withdraw funds for non-medical expenses before the age of 65, you will be subject to income tax on the withdrawn amount, plus a 20% penalty. This penalty can discourage you from using HSA funds for non-medical purposes, which limits the flexibility of the account.


4.    Limited Accessibility: 

While HSAs can provide significant benefits for managing healthcare costs, not everyone has access to them. To open an HSA, you must have an HDHP, which may not be available through your employer or may not be the best option for your specific healthcare needs. Lack of accessibility can be a significant drawback for if you would otherwise benefit from the tax advantages and flexibility of an HSA.


Should You Participate in an HSA?

Health Savings Accounts (HSAs) offers individuals and families a unique financial tool for managing healthcare expenses and saving for retirement.  With tax advantages, potential investment growth, and flexibility in spending, HSAs can provide significant benefits.  However, there are potential downsides. The requirement of having an HDHP, limited contribution limits, withdrawal penalties, and limited accessibility are things that should be considered when evaluating whether an HSA is the right choice for you.

It is vital that you carefully assess your healthcare needs, financial goals, and available options before choosing to participate in an HSA.  A financial advisor like myself or your healthcare professional can provide you with  helpful guidance. By carefully considering the advantages and disadvantages, you can make an informed decision and determine whether an HSA is in alignment with your overall healthcare and financial strategy.

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This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.