by Charissa Anderson, CFP®, CFDA®
Senior Vice President
Portfolio and Wealth Management
One of the most powerful savings vehicles for health care costs is the Health Savings Account (HSA), a type of savings account that lets you set aside money on a pretax basis to pay for healthcare expenses. Funds in an HSA grow tax-deferred and come out tax free when used for qualified medical expenses such as Medicare Part B and D premiums, vision and dental care expenses and qualified long-term care insurance premiums up to certain limits.
To contribute to an HSA, you must be enrolled in a qualified high-deductible health plan (HDHP). For 2023, an individual can contribute $3,850 a year and a family can contribute $7,750 – however, those over 55 years old can make an additional catch-up contribution of up to $1,000.
Unlike Flexible Spending Accounts (FSA), there is no "use it or lose it" rule. Balances roll over year to year for future use, even if you no longer have a high deductible healthcare plan. Retaining receipts for expenses paid out of pocket while covered under the HDHP adds flexibility, as under current rules you can reimburse yourself from the HSA at any time in the future. To make the most of an HSA, consider investing your contributions for the long term and paying for current healthcare costs out of pocket. This approach maximizes the tax-free growth benefits and increases the funds available for health care costs in retirement.
It is important to note, if you withdraw money from an HSA for nonqualified medical expenses, you will be subject to income tax plus a 20% penalty on the amount withdrawn. However, once you turn age 65, the penalty no longer applies. You may choose to use your HSA for nonmedical expenses, and it will function similarly to a traditional IRA. In this case, funds can be withdrawn without incurring a penalty, and you only pay income tax on the withdrawals.
HSA Distribution Penalties and Taxation
An HSA is a great vehicle for healthcare savings during your lifetime, but it is important to pay attention to the named beneficiary on the account. If your spouse is the beneficiary, he or she will inherit the balance tax-free and may continue using the HSA as their own. However, if a non-spouse is named, the funds will be distributed and taxed as income to the beneficiary based on the fair market value in the year of the account owner’s death. There is an exception for qualified medical expenses of the original account holder paid within a year of death. If an estate is the beneficiary, the HSA will be distributed to the estate and taxed as income on the account holder’s final income tax return.
Please reach out to your portfolio manager if you would like to take a deeper look into how healthcare planning affects your overall financial picture.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.