By Paul Bullock
Health savings accounts (HSAs) have steadily risen in popularity, emerging as a robust solution to help with rising healthcare costs and their other financial planning needs. Given that, it makes sense that many retirees are worried about how to pay for these healthcare expenses in retirement.
And these unique accounts do more than just offer a place to stash extra funds. They allow a strategic approach for individuals and families to make a tax-savvy move while saving for future, unpredictable healthcare costs.
However, there’s a catch. Despite the surge in HSA adoption rates, many of its users only scratch the surface of the potential advantages available. In this article, our goal is to demystify HSAs so you uncover their various benefits and the smart tax strategies that HSAs afford—setting the stage for a healthier financial future for you and your family.
Triple Tax Advantage
One of the most compelling features of the health savings account is its trio of tax benefits, often referred to as the “triple tax advantage.” To start, contributions made into an HSA are pre-tax, directly reducing your taxable income for the year. This essentially translates to a discount on medical expenses since every dollar contributed is a dollar less you’re taxed on. Moreover, for individuals in higher tax brackets, the savings can be particularly pronounced, providing an immediate financial incentive to contribute.
But the tax advantages don’t stop there. The funds within the HSA have the potential to be invested and grow, and this growth occurs tax-free, enabling your savings to compound over time without the drag of taxation.
Finally, when the need arises to cover qualified medical expenses, withdrawals from the HSA remain tax-free. This blend of tax deductions on contributions, tax-free growth, and tax-free withdrawals for medical expenses makes the HSA a unique tool in financial planning.
In our work with people near and in retirement, having a solid plan for taxes is one of the most important things you can do, and HSAs can be a key tool in that overall plan.
HSA Limitations
While the health savings account boasts many benefits, it’s essential to be aware of its considerations and limitations. To begin with, there are annual contribution limits imposed on HSAs which change on a yearly basis. In 2024, an individual can contribute up to $4,150 and a family can contribute up to $8,300.
Furthermore, to be eligible for an HSA, one must be enrolled in a high-deductible health plan (HDHP). While HDHPs often come with lower monthly premiums, they require the policyholder to pay more out of pocket before the insurance benefits kick in, which might not be the best fit for everyone, especially those with frequent or anticipated high medical costs.
Additionally, caution is advised when withdrawing from an HSA: using the funds for non-qualified medical expenses before age 65 can lead to taxes plus a hefty 20% penalty. It’s crucial, therefore, to approach HSAs with a clear understanding of both their advantages and their constraints and make sure you consider the entirety of your financial situation before using them.
Other Key Benefits
1. No Income Restrictions for Contributions
HSAs stand apart from certain retirement accounts, such as Roth IRAs, which impose income-based constraints. This means that whether you’re at the start of your career with modest earnings or in a high-income bracket, HSAs are available for you to set aside funds for medical expenses.
2. Immediate Access for Medical Expenses
HSAs are designed to serve dual purposes. Not only are they a tool for long-term savings, but they also keep funds readily available whenever a medical need arises. This immediate access helps prevent sudden healthcare costs from derailing your financial plan.
3. Rollover Benefit
Unlike the stringent conditions tied to the flexible spending account (FSA), HSAs come with a comforting assurance: unused funds aren’t forfeited at the year’s end. Instead, they seamlessly roll over, allowing you to accumulate a health-focused nest egg that can support bigger medical expenses in the future.
4. Senior Flexibility
As individuals transition into their golden years, HSAs continue to provide value. Once past the age of 65, account holders enjoy greater freedom, allowing them to tap into the funds for non-medical needs without any penalties. While taxes are owed on these withdrawals, the flexibility is akin to having an additional retirement savings account.
5. Versatile Investment Choices
While the investment options depend upon where you have your account, the choices are typically broad, allowing you to diversify your holdings to an investment selection that matches your goals and risk tolerance. Further, some employers who recognize the value of HSAs might even contribute to your HSA account, leading to accelerated account growth.
Can HSAs Help You Maximize Your Health and Financial Wellness?
Understanding and maximizing the benefits of a health savings account (HSA) can make a significant difference between managing healthcare costs efficiently and being caught off guard by unexpected medical expenses. It’s also a tool to manage your taxes more efficiently and provide a financial safety net.
At Wellington Investment Advisors, our team is focused on helping our clients create an income stream in retirement that lets them pursue their goals without the stress or worry of running out of money. If you’re looking for that type of partnership, we’d love to meet. You can schedule a no-obligation introductory meeting or get in touch with me at paul@wellingtoninvestmentadvisors.com or by phone at (812) 333-0874.
About Paul
Paul Bullock is CEO of Wellington Investment Advisors, an independent, boutique fiduciary firm serving pre-retirees and university faculty across Indiana. With over 34 years of financial experience, Paul is committed to building long-term relationships through thoughtful, personalized investment advice and guidance. He focuses on a disciplined tactical asset allocation approach to money management through a strong understanding of economic and market conditions and strives to build trust with clients by providing sound guidance. Paul understands the hard work his clients have put in to arrive at where they are today and wants to see them succeed in their goals for the future. Paul graduated from the University of Texas with an MBA, as well as a bachelor’s degree in finance, and has been dedicated to assisting clients with their financial needs ever since. When he is not working, Paul enjoys time with his family and is also an avid equestrian polo player who helps raise money for over 18 different charities through his playing. To learn more about Paul, connect with him on LinkedIn.