An HSA is not an FSA
One reason HSAs are often overlooked is because people conflate them with Flexible Spending Accounts (FSA) where any unused balance at the end of the year will be surrendered to your employer. That is not the case with an HSA. Your balance will continue to roll forward, meaning that the balance in this account can keep growing, and will remain with you, not your employer, should you change employers throughout the course of your career and after you retire.
Strategically using your HSA
Next, let’s look at how to use your HSA once you know that you are eligible to contribute and know how much you can contribute. Since the account balance rolls forward each year and HSAs allow for the funds within them to be invested, the most powerful thing you can do is invest the funds for the long run. Depending on which bank or custodian you have your HSA through, you can have different options on how and what you are able to invest in. if you are eligible for an HSA through your work, it is always best to check and see if they make an employer contribution to your account as well. This does not go towards your contribution limit for the account, so it is a way to get even more money into your account. One thing to note, there are some HSA accounts that have a required minimum balance in cash to cover immediate expenses before you can begin to invest, so do make sure you check the fine print of your HSA provider
The power of compound interest
As the chart below illustrates, most of your healthcare costs will occur after you are 55. In 2021, people that were 55 or over accounted for 31% of the population. However, they accounted for 55% of the total health spending. As such, if you put money into your HSA early and let it compound while invested, you should have more funds available to you at a time when you will need to do most of your healthcare spending.
Can I use my HSA funds for non-medical expenses?
One common question is, “What happens if I use the funds for a non-qualified medical expense?” It is possible to do, but not recommended because that money will be considered taxable income. If you are younger than 65, that income will also be assessed a 20% penalty. At 65+ the 20% penalty is no longer assessed, but the funds will still be taxed at your income tax rate – much as if the funds were coming from a Traditional IRA. We do not recommend using your HSA dollars for non-medical expenses unless it is an emergency and even then, would encourage you to speak with your CWM advisor to explore other options before withdrawing from your HSA account.
Designating Beneficiaries on an HSA Account
HSA accounts are inheritable and as with all financial accounts, we recommend designating a beneficiary. If your spouse is listed as the beneficiary, the account will transfer to them with the tax benefits maintained. However, if the beneficiary is a child or non-spouse, the HSA funds must be distributed and income taxes paid on them, regardless of how the funds will be used.
One last (and covert) strategy to maximize your HSA
Cue the Mission Impossible theme music: one last way that you can potentially maximize an HSA considers the rules around reimbursement. Technically, there is no time limit for you to withdraw funds from the HSA to cover qualified medical expenses. That being said, as long as you had an HSA at the time a qualified medical expense was incurred, you can pay that expense through your normal checking account and hold onto the receipt for future reimbursement from the HSA. If you have the funds to pay these expenses out of pocket, you technically have the power to allow the assets in the HSA to grow tax free and then years in the future submit for reimbursement of the previous expenses. In order to do this, you will need to keep track of every receipt and every expense that you have had. Keep in mind, the IRS can always audit the activity in an HSA and if things do not match up you will pay penalties and fines. However, if you keep meticulous records and want to truly maximize your HSA, this could be a strategy for you.
The key takeaways (or TLDR)
- HSAs allow you to save pre-tax income to cover qualified medical expenses so long as you have a HDHP (High Deductible Health Plan)
- HSA dollars grow tax-free and are not taxed so long as the funds are spent on qualified medical expenses
- For tax year 2024, the maximum contribution amounts are $4,150 for individuals and $8,300 for family coverage
- If you are 55+, you can add up to $1,000 more as a catch-up contribution
- HSA funds can be rolled over indefinitely
HSAs can be a very powerful tool to use in your financial plan and one we consider as part of your holistic financial health. As is generally the case with finances, there is a balance that can be struck in setting up and using the HSA. It is always best to check with your CPA about your specific tax situation and what the tax ramifications might be for you.
If you are interested in a more robust conversation regarding your specific situation, please Contact Us or call the office at (425) 778-6160 to schedule an appointment with your CWM advisor.
*As of 2024, California and New Jersey still do not allow your HSA contributions to be deductible on your state income tax. There can also be local taxes depending on where you are in the country. If you are eligible to make HSA contributions, it is best to check with your CPA about your specific tax situation and what the tax ramifications might be for you.
**Comprehensive Wealth Management, LLC does not offer tax or legal advice. Please consult your CPA or attorney for specific tax and legal questions.
