Health Savings AccountEmployee Benefits Tax Planning
What is an HSA?
A health savings account offers powerful tax benefits that stretch your healthcare dollars further. You contribute pretax dollars to the account, and your invested money grows tax-free. You can also withdraw money tax-free if you use if for qualified medical expenses (some state taxes might still apply). This triple tax benefit makes HSAs a helpful tool with two roles: You can spend money on current healthcare expenses or invest to cover future ones. The account is portable which means you don't lose funds by changing employers which makes the account different from a Flexible Spending Arrangement (FSA).
How should I invest my HSA?
If you're using your HSA to invest, your must first determine your time horizon and and appropriate risk level, which will then inform your asset allocation. If you plan to spend and invest with HSA, make sure you keep at least your deductible amount in cash.
Are there any other ways that I can use an HSA?
- As a retirement account: After age 65, you can withdraw HSA money for any purpose and avoid the 20% tax penalty. However. you'll pay regular income tax on withdrawals for non-qualified medical expenses.
- To pay insurance premiums under COBRA: You generally can't use HSA money to cover an insurance premium or regular payments for an insurance policy. However, if you lose your job and you keep your insurance under COBRA, you can pay the premium with HSA funds. Using tax-advantaged HSA dollars to pay COBRA premiums is a helpful benefit, because COBRA enrollees are often responsible for paying the entire premium.
- To cover long-term care: You can either use the money to cover long-term care costs or pay insurance premiums (up to a specific amount for qualified contracts).
- To cover medicare premiums: You can use HSA dollars to pay certain Medicare expenses, including premiums for Part B and Part D prescription-drug coverage, but not supplemental (Medigap) policy premiums. For retirees over age 65, who have employer-sponsored health coverage, an HSA can be used to pay your share of those costs as well.
HSAs offer a number of benefits: not only spending for the short-term, but also saving for longer-term qualified medical expenses, including those in retirement. Talk with your planner about the advantages of HSAs and determine if this financial planning tool could improve your financial success into the the future.