Using a Health Savings Account (HSA) is a prudent financial decision that many Americans overlook or simply do not understand.

One of their primary benefits is that contributed funds do not run out each year like the “use it or lose it” provisions with flexible spending accounts (FSA). Instead, unused funds roll over each year and can be used for future medical expenses. This feature creates a unique planning opportunity to help cover future medical expenses, which is important since it is well documented that medical expenses are the largest expense for many in retirement. A recent study by Employee Benefits Research Institute found that some retired couples would need as much as $370,000 to cover medical expenses in retirement—a forecast that is growing every year.¹

HSAs have three inherent tax advantages:² 

1. Contributions are 100% tax-deductible.
2. Investment growth and interest are tax-exempt.
3. Withdrawals for qualified health expenses are tax-free. 

Who qualifies for an HSA?

HSAs are available to those who are covered by high-deductible health plans. 

To be HSA-eligible, an individual cannot be:

• Covered by another health plan, except as permitted by the IRS
• Claimed as a dependent on another person’s tax return
• Enrolled in Medicare (funds acquired through an HSA before using Medicare can be used)

If you have any questions, your best option is to simply inquire with your employer and see if you qualify for an HSA.

Are you contributing to your HSA? 

Contribution limits are set by the IRS ($3,550 if single or $7,100 for family). The catch-up provision for age 55 or older is $1,000. Contributions are 100% tax-deductible.

A person can do a partial rollover from an IRA into an HSA (within IRS limits) as well to help fund the HSA.

The amount you contribute is an important consideration and it is best to consult with your BFSG advisor to best understand how you can potentially benefit from an HSA and determine what amount is most beneficial for you to contribute.

Are you spending your HSA contributions? 

Funds can be used for current or future medical expenses and even Medicare premiums.³

Funds can be withdrawn from HSAs for any reason without penalty after age 65, though income taxes will be owed if the money is used for non-qualified expenses.⁴ 

Health care burdens are likely going to be a lot higher in retirement and the triple-tax savings of HSAs favor investing HSA assets rather than using them right away.

Many HSAs feature investment account options, depending on the account administrator.

We can help go over your investment options available to you and help analyze the fees you are being charged.

1. “Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $370,000, Up From $350,000 in 2016,” EBRI Notes, Vol. 38, No. 10, Employee Benefit Research Institute, December 20, 2017.
2. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, U.S. Internal Revenue Service, 2017. Tax laws vary by state. For example, Alabama, California, and New Jersey do not allow state income tax deductions. Be sure to check your state’s tax laws or consult a certified public accountant.
3. A retiree can use a health savings account even when on Medicare to cover medical expenses.
4. Penalties (e.g. withdrawals for non-qualified health expenses) exist. Check IRS.gov.