What are Health Savings Accounts (HSAs)?

By Argent Wealth Management, LLC on June 7, 2023

If your employer offers a High Deductible Health Insurance Plan, you can pair it with a Health Savings Account to pay qualified medical expenses and potentially save on taxes.  Here is how it works:  You fund your HSA with pre-tax dollars and either pay medical expense now with money that was not taxed or invest the account to pay medical expenses in the future. Unlike flexible spending accounts, HSAs allow for unused funds to be carried over to the next year. 

What are the tax benefits?

HSAs offer a triple tax advantage!

1. The contributions are tax deductible, lowering taxable income in the year you contribute.
2. You can invest the funds and both the growth, and any income earned is not taxed.
3. Withdrawals are tax free if used for qualified medical expenses.

How much can I contribute?

Given the structure of these accounts, there are a few limits to keep in mind. The IRS has released these limits for 2023 below.

What if I don’t use all the funds?

These funds can be carried over to the next year and even into retirement. It is not uncommon to see HSAs dedicated for post-retirement health care costs.

What should I watch out for?

Prior to age 65, any distribution made for non-qualified medical expenses will be subject to ordinary income taxes as well as a 20% penalty.

Other considerations:

In addition to the employee contributions, it is common that the employer will provide annual contributions, so it is important to check with your HR department as you evaluate your insurance options.

At age 65, it is possible to treat your HSA like your 401(k) or traditional IRA. Once you reach age 65, you are permitted to take distributions from your HSA for non-qualified medical expenses. These distributions are subject to ordinary income tax; however, the 20% penalty is waived.  

If you are evaluating your health insurance options, please reach out to learn how Argent Advisors incorporate healthcare into their financial plans.

Sources:

https://www.irs.gov/pub/irs-pdf/p502.pdf

https://www.irs.gov/publications/p969