Why You Should Pay Attention to Your HSA / Health Savings Account
Jayne W. Di Vincenzo, AIF (R) , CEP (R) , President
Fiduciary EDGE Advisors, LLC
The short answer is yes because the pros outweigh the cons, and that helps explain why Health Savings Accounts (HSAs) are growing in popularity.
They’ve become popular primarily because the money goes into these accounts tax-free. If you contribute the maximum for a family this year you will lower your taxable income by the same amount: $7200. And, like the ROTH IRA, money is distributed tax-free -- as long as the funds are used for medical and health-related expenses.
Still, there are a lot of misunderstandings about health savings accounts, so here are answers to some of the most commonly asked questions I hear from my clients.
Can I deposit as much as I want in a health savings account? No, the IRS sets limits that change every year. For 2021, the limits are $3,600 for individuals and $7,200 for families. If you want to max that out, budget $300 per month for individuals and $600 for families. And, if you’re at least 50 years old you can increase your contribution by another $1,000 totaling $4600 for single tax filers and $8200 for families.
Do I lose the money I deposit in my HSA if I don’t use it during the year I deposit it? No. You can use the money whatever year you need it—you can leave it there for years and even name a beneficiary for your account. What you don’t use one-year rolls over to the next year and potentially grows for future use. A lot of people confuse HSAs with flexible spending accounts, these limit the amount that can be carried over to no more than $500—no these have decreased in popularity as a result.
What if I don’t use the money in an HSA for medical expenses? That’s discouraged. You’ll have to pay taxes on that money, plus a 20-percent penalty. There’s an exception, if you are collecting state or federal unemployment benefits and/or using COBRA health insurance, then you can use your account to pay your health insurance premiums.
What constitutes a qualified medical and health-related expense? That’s a good question because it’s not always obvious. Just about any expense you have at a doctor’s office, an urgent care center or a hospital qualifies. Other, less obvious expenses, such as vitamins or treadmills, for example, count if your doctor gives you a letter of medical necessity (LMN). Big-ticket items such as hot tubs can qualify. Thanks to the CARES Act, even over-the-counter medications and tampons are considered a medical expense.
What if I’m on MEDICARE, can I open and fund an HSA account and can I use the funds for more than out of pocket medical expenses?
Once you are enrolled in Medicare you can no longer contribute to an HSA account. Be careful, if you file for Social Security you are automatically enrolled in Medicare Part A. That said, turning 65 has other benefits: you now have more options for using your HSA funds. There is no tax or penalty for using your HSA account for qualified medical expenses or to pay for Medicare parts A, B, D premiums and Medicare HMO premiums. That said, if you purchase a Medicare supplemental policy, such as Medigap, these are not eligible for tax-free distributions from your HSA. Instead, money used for these costs is taxed as ordinary income but incur no penalty.
How exactly do I pay for those things? Most HSAs issue a debit card or you can print the reimbursement forms and file a claim.
How can I invest the money in my health savings account? The companies that offer health savings accounts have different rules. One rule involves the minimum amount you need to have in your account before you can invest. Sometimes that’s as little as $1,000. If you meet that threshold, you need to decide to turn your HSA into a health investment account and choose which mutual funds you want to invest in and how much you want to contribute to investments per month.
HSAs sound great. What are the drawbacks? Health savings accounts are for people with high-deductible health insurance policies, which charge smaller monthly premiums. But if you’re dealing with a serious medical problem, the deductible can wipe out what’s in your account. Reminder, the funds should be used toward medical related costs, of which, unfortunately for most of us add up to the tens of thousands over a lifetime.
Anything else to worry about? You should keep good records of your expenses to prove that your withdrawals were used for qualified health expenses in the event of an audit. Some HSAs charge a monthly maintenance fee or a per-transaction fee.
Jayne W. Di Vincenzo, AIF, CEP, President Fiduciary EDGE Advisors, LLC based in Savannah, GA and serving clients throughout the US has helped clients solve the financial readiness puzzle for over 22 years. Contact Jayne at Jayne@Fid-EDGE.com or 912-695-0203.
Securities offered through Cambridge Investment Research, Inc. Advisory services through Cambridge Investment Advisors, Inc. Member FINRA/SIPC.
Please consult with your tax advisor before making a decision regarding your personal situation and taxes.
COPYRIGHT Jayne W. Di Vincenzo 2021. Do not share or copy without permission.