You’ve come to the right place
Chances are you’ve heard of an HSA (Health Savings Account) because they’re becoming an increasingly popular workplace benefit. But you’re not alone if you’re struggling with the nuances of the HSA and how it can complement your existing retirement strategy. Read on to learn more.
HSA overview
HSAs, or Health Savings Accounts, are savings accounts that are meant to help you pay for qualified medical expenses using pre-tax contributions. Unlike FSAs (Flexible Spending Accounts), HSA balances completely roll over from year to year, offering increased flexibility.
HSA tax advantages
Many of the retirement accounts you’re probably familiar with (like 401(k)s and IRAs) are advantageous in that they’re double tax-advantaged. (Learn more about 401(k)s and IRAs here.)
Get this – HSAs are incredibly unique in that they are triple-tax advantaged:
- Contributions reduce your taxable income in the current year
- The balance (and investments) in your account will grow tax-free
- Withdrawals used for medical expenses (also known as qualified withdrawals) are tax-free
Investing in your HSA
Many HSA plans allow for stock market investments within the account. While you may have to keep a certain balance uninvested (usually around $1,000), you can put the remaining amount into long- or short-term investments.
If you have low healthcare costs now, but expect your healthcare costs to increase in retirement, you might consider using your HSA as a long-term investment account to pay for future medical expenses. You’ll be able to take advantage of the tax-advantaged status of the account without letting your funds sit in cash.
Who’s eligible?
First and foremost, you must be enrolled in a qualified High Deductible Health Plan (HDHP) to be eligible for an HSA. There are a number of additional qualifications:
- You must be over 18 years old
- You cannot be claimed as a dependent on someone else’s tax return
- You cannot be enrolled in Medicare
- You cannot be covered by someone else’s medical plan (i.e. a spouse)
Contribution limits
| Year | 2022 | 2023 | ||
| Self only coverage (employer+employee) |
$3,650 | $3,850 | ||
| Family coverage (employer+employee) |
$7,300 | $7,750 | ||
| Catch up contributions (if age 55 or over) |
+$1,000 | +$1,000 |
Using your HSA to pay for your medical expenses
You can use your HSA balance to pay for qualified medical expenses, which include common items like prescriptions, eyeglasses, and doctor’s office visits, among others.
You’ll likely have a debit card from your HSA provider that will allow you to pay for medical expenses on the spot. You can also save your receipts and submit an expense report later through your HSA provider’s website to reimburse yourself from your HSA. This can be a good move if you don’t currently have sufficient funds in your HSA, or if you’d prefer to let your HSA investments grow before reimbursing yourself.
Other withdrawal rules
As noted above, you can withdraw funds at any time to pay for – or reimburse yourself for – qualified medical expenses. However, if you need to make a withdrawal that’s not for a qualified medical expense, you’ll be subject to income tax as well as a 20% penalty.
Once you turn 65 (or if you become disabled), you’ll no longer be subject to the 20% penalty but will still have to pay income tax on any withdrawals not used for qualified medical expenses.
HSA consolidation
If you’ve worked for a few companies that offered an HSA plan, you might have multiple HSAs floating around that can be difficult to keep track of. If this is the case, you might want to take advantage of an HSA rollover or an HSA transfer. (Learn more about the differences here.)