HSA Planning

Everything You Need to Know About HSAs

Healthcare costs present a huge financial challenge for many households. With a health savings account (HSA), you can pay for medical costs with pre-tax income.

The cost of healthcare has steadily increased over the years. The average retired couple age 65 in 2022 will need around $315,000 (after taxes) for healthcare expenses alone. The true amount will undoubtedly vary because everyone’s health situation is different, but healthcare in retirement won’t be cheap for most people.

Fortunately, health savings accounts (HSAs) give applicants a tax-advantaged way to save.

Health Savings Accounts 101

Health savings accounts (HSAs) are one of the best ways to save for medical expenses. This type of account allows you to contribute money on a pre-tax basis, meaning that your contributions can grow tax-free until you use them to pay for qualified healthcare expenses.

The way it works is you deposit pre-tax dollars into the account and then you can use this account to pay for deductibles, copayments, coinsurance, and other expenses. Because this cash is deposited into your HSA before being taxed, it helps you lower your overall healthcare costs.

Here are a few of the key features you should know about:

  • You must be covered by a qualified high-deductible health plan to open an HSA.
  • HSAs are tax-advantaged accounts. So long as you use it correctly, money that moves in and out of an HSA is 100% tax-free.
  • HSA funds do not expire, and they roll over from year to year. It is not a use-it-or-lose-it account like other common health spending accounts.
  • An HSA is a powerful retirement tool that you can use to complement other retirement savings.
  • When used correctly, HSAs can reduce overall healthcare costs.

Eligibility

To be eligible for an HSA, there are certain rules surrounding the type of health insurance you carry, including that it be coverage that comes with a high deductible. In most cases, you will just need to make sure you are currently enrolled in a High Deductible Health Plan (“HDHP”) and you’re a US taxpayer. However, several events will disqualify you from being HSA-eligible, even if you’re covered by a qualified HDHP and are a US taxpayer. While the list below doesn’t include all disqualifying events, these are the most common ones:

  • You cannot be claimed as a dependent on another person’s tax return.
  • You or a spouse cannot be covered by any other disqualifying insurance coverage such as Medicare.
  • You or a spouse cannot be covered by a full-purpose Flexible Spending Account or Health Reimbursement Arrangement. 

HSA Limits 2022 and 2023

For 2021 and 2022, the deductible amount required in order to qualify for an HSA is at least $1,400 for an individual and at least $2,800 for a family. For 2023, there are some new changes:

If your employer contributes to your HSA on your behalf, that counts toward your annual limit. HSA contributions generally vest immediately, meaning that any contribution from your employer is yours to keep, even if you leave your job shortly after your employer contributes the money.

Penalties and Fees

When you set up an HSA, you can use the money for qualified medical expenses. If you need to withdraw the money from your HSA for non-medical expenses before age 65, you can do so. It’s important to note that you’ll have to pay a 20% penalty for withdrawing funds early and income taxes on the amounts you withdraw.

This 20% penalty is double the 10% penalty that applies to early 401(k) or individual retirement account (IRA) withdrawals. Money withdrawn from an HSA not used for qualifying medical or dental expenses is taxed as ordinary income, regardless of whether you incur the penalty.

Unlike with flexible spending accounts, you do not have to spend money in an HSA in the same year you make the contribution. You also are not subject to the rules for required minimum distributions (RMDs) that apply to other types of pre-tax retirement savings accounts such as 401(k)s and traditional IRAs.

Summary of HSA Benefits

There are many reasons why someone would want to take advantage of an HSA. To summarize:

Taxes: Your HSA contributions go into your account before taxes. The money you save to your HSA lowers your taxable income – so you may pay less in taxes.

Medical Expenses: Use your HSA funds to pay coinsurance, copays and your deductible (all tax-free). You can also use HSA funds to pay for some costs your plan doesn’t cover, like dental care, orthodontia contacts and eyeglasses.

Control: take control of your healthcare spending and plan how much money to set aside for healthcare costs.

Save for Retirement: You can use your HSA to save for retirement. At age 65, you can use the funds for any purpose without a penalty. The money you take out to pay for eligible health care expenses continues to be tax free. You also can take money out for other reasons without paying a penalty.

Final Thoughts

While HSAs are not a silver bullet that will fix our healthcare problems, they are still one of the strongest tools available to help many Americans reduce costs and better their overall financial situation. 

Opening an HSA makes sense for people who are generally healthy and are interested in saving up for future healthcare expenses. It’s also a valuable account for anyone who has immediate healthcare savings needs. 

It’s never too late to start planning your health savings account needs. There’s an account for every type of income. As mentioned, all HSA plans offer some sort of tax advantage. The financial advisors at APO Financial can discuss more options and reasons to have a particular HSA. If you would like to know about your options, sign up for a complimentary financial review. 

We can work with you to decide on allocation and contribution strategies, help you create a financial plan after you stop receiving a paycheck, and provide options for turning your savings into lifetime retirement income. Contact us here today to get started.


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Annuities can be an important part of an overall portfolio but may not be appropriate for everyone. Before purchasing an annuity, it is important to understand the details of the product. Certain products may not be available in your state. The terms of each indexed annuity varies. It is always important to speak to a financial professional. about an annuity’s features, benefits and fees, and whether an annuity is appropriate for you, based on your financial situation and objectives. Participation rates, cap rates and/or index spreads may be subject to change by the insurance company according to the annuity contract provisions. If the insurance company makes such changes, this could adversely affect the return. Guarantees of an indexed annuity are backed by the claims-paying ability of the underwriting insurance company. The surrender charge period for a product may be longer, and the surrender charges may be higher than other annuity products. Indexed annuities are long-term investments. If the annuity contract is surrendered early, there is the possibility of a surrender charge being imposed and/or the funds may be subject to income taxes. The IRS may also impose a 10% penalty on withdrawals prior to age 59 ½, depending on the circumstances. With indexed annuities, there is the potential to lose money, depending on the product charges and minimum guarantee contract provisions. For additional information on annuities, reference the following websites: The FINRA (www.FINRA.org), the Securities and Exchange Commission (www.SEC.gov), Insured Retirement Institute (www.irionline.org), the National Association of Insurance Commissioners (www.NAIC.org) or your state's insurance department.
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