Five Fascinating Facts About HSAs

The Health Savings Account (HSA) has become quite a popular retirement savings tool because of its triple tax advantage. You can contribute pre-tax dollars, invest the funds while enjoying tax-free growth, and withdraw the funds free of tax if used for qualified medical expenses.

1. HSAs are portable.

Similar to an employer-provided retirement plan, such as a 401k or 403b, HSAs can be transferred to another provider upon termination.

Unlike a 401k or 403b, most employers allow you to transfer your HSA to another provider while still employed. You can still make contributions via payroll deductions and receive employer contributions in the account with the new provider. This strategy might be used for better investment options and/or lower maintenance fees.

2. There is no reimbursement time limit on HSAs.

Perhaps the most impactful component of an HSA is that reimbursements are not time-limited. This means you can delay reimbursement for a medical expense to years down the road, allowing the funds invested in your HSA to continue to grow tax-free.

For example, let’s say you had a $7,000 medical expense this year. You decide to pay for the expense out-of-pocket and leave the $7,000 invested in your HSA. Assuming a 7% rate of return, in 20 years, that $7,000 has grown to a whopping $27,000! Then, you decide to reimburse yourself for the $7,000 medical expense, leaving $20,000 to continue to grow.

Some might call this strategy the “shoebox method,” as it’s important to keep medical receipts in case you need to justify the withdrawals to the IRS.

3. Adult children on your health plan can contribute to their own HSA.

Stemming from the Affordable Care Act (ACA), children can be on their parents’ healthcare plan until age 26. Adult children can reap major benefits for families covered by an HSA-eligible plan, as they can contribute the full family maximum (for 2024, $8,300) to their own HSAs.

To be eligible, the adult child must be covered under a High Deductible Health Plan (HDHP), cannot be on another health plan in addition to the HDHP, cannot be enrolled in Medicare, and cannot be claimed on someone else’s tax return. (See IRS Publication 969 for additional details).

Let’s look at an example. Bob and Mary are married with one child, Claire, who is 23 years old. Claire works full-time and is not eligible to be claimed as a dependent on Bob and Mary’s tax return. She is covered by her parents’ family HDHP and does not have any other healthcare coverage.

For 2024, Bob and Mary can contribute $8,300 (the family maximum) to their HSA. In addition, since Claire can’t be claimed as a dependent, she can contribute $8,300 to her own HSA and deduct the contribution from her tax return. Even better, Bob and Mary can contribute to Claire’s HSA as long as the total contributions made to Claire’s account don’t exceed the maximum of $8,300. Claire could still deduct the full $8,300 on her tax return, even if her parents contributed to the account.

4. You can’t contribute to an HSA once on Medicare.

If you enroll in Medicare Part A and/or B, you can no longer contribute to your HSA.

There might, however, be an alternative if you are still employed at age 65. If you are currently working for a large employer, you might be able to delay Part B and enroll later if you lose your current group coverage. (Be sure to consult your Human Resources department to determine whether their group plan can still be your primary coverage and if you can delay Part B). If you delay collecting Social Security benefits, you can also delay Part A and maintain your ability to contribute to an HSA.

When the time comes and you want to claim your Social Security benefit, you must stop all contributions to your HSA six months before you collect Social Security to avoid penalties. This is because when you apply for Social Security, Medicare Part A will be retroactive for up to six months.

Medicare and HSAs are a sticky wicket, so plan ahead and consult an expert.

5. If a non-spouse inherits an HSA, it is fully taxable.

You can avoid probate by naming beneficiaries on an HSA. If you name your spouse as a beneficiary of your HSA, they can continue to reap the tax-free benefits. If, however, a non-spouse inherits the account, the HSA is immediately payable and taxable.

If you are single or widowed, consider spending down the account, especially using the shoebox method. If you are charitably inclined, consider naming a charity as the beneficiary since they will avoid taxation and fulfill your remaining bequests with other assets.

Conclusion

HSAs can be a powerful savings tool, and understanding their unique characteristics will both help and protect you. Reach out to your Financial Planner to discuss how you can incorporate an HSA into your financial plan!

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