May 16, 2022

According to a Fidelity Investments study, a 65-year-old couple retiring in 2021 should expect a $300,000 healthcare expense throughout their retirement. This estimate is $157,000 for single women retirees, and $143,000 for single men retirees. Another study by Nerdwallet lists the average and median 401k balance for people Ages 60-69 Average 401(k) balance: $195,500. Median 401(k) balance: $62,000.

These studies clearly show that the average American doesn’t have enough in retirement savings to even cover their medical bills and will likely struggle to pay for healthcare services after they retire; most people have an increased need for healthcare. However, the HSA was created to help Americans with these problems.

A Health Savings Account (HSA) is a tax-free account created by an individual to save for medical expenses. In this article we will discuss the Health Savings Account (HSA) why it exists, how it benefits you and why you should prioritize funding this account vs your other accounts.

What Does the Health Savings Account Cover?

The HSA (Health Savings Account) is a tax free account that allows you to pay for various medical expenses such as Copays, Deductibles, Dental, Acupuncture, Massage Therapy, Prescriptions Drugs, Drug Rehab. However, you can’t pay for premiums with your HSA. For a complete list of eligible expenses you can visit Publication 969.

The HSA operates like a normal retirement account in the sense that you can invest the HSA contributions into the stock market and have no tax levied on the earnings made.

Who Qualifies for the HSA?

To qualify for a HSA you must meet the eligibility standards set by the Internal Revenue Service. These are:

·       The individual must be under the age of 65

·       They are not enrolled in Medicare .

·       They aren’t listed as a dependent on another’s tax return

·       The individual must have a qualified high-deductible health plans (HDHP)

The HSA has both a minimum and maximum limit on how much can be contributed annually, in 2022 the maximum contribution for an individual is $3,650 and $7,300 for a family, while the minimum is $1,400 for an individual or $2,800 for a family.

The opportunity is granted to people 55 years or older to add an extra $1000, as a sort of catch-up by the end of the tax year. Self-employed or unemployed people can also open a HSA, as long as they qualify.

Benefits of HSA

Front Tax Page Deduction

Unlike an IRA account, you get a front-page tax deduction regardless of your income level ($3,650 for self-only, $7,300 for Family). If you are married and in a 22% tax bracket, that is worth $1,606. If you are in a 37% bracket, that is worth $2,701. You can pay for any medical expense without worrying about tax for the rest of your life, and you get a triple-tax benefit that combines both the traditional and Roth IRAs.

While HSAs are usually pretax deductions, you can still contribute even after tax and make the deduction from your tax return gross.

Control, Flexibility and Investment Options

With an HSA, you also control how the money is spent. This gives you the opportunity to browse through numerous healthcare providers till you find the one that works for you. As the money can be used at your discretion, you can invest however you want; you can self-direct your HSA to own crypto, real estate, land, or businesses. Certain HSA offer clients interests based on the unused money or can invest the money.

RollOver

Your HSA is a vested account which means that money unspent at the end of the year is fully rolled over. This makes it a better option than FSA where only about $550 can be carried into the next year.

Anyone Can Contribute

Anyone can contribute to your HAS. Your employer, relative or friend can choose to contribute to your HSA but the IRA limits this contribution. And since it’s your HSA, it’s still yours even if you leave your employer or insurance provider. 

Disadvantages of HSA

However, high deductible health insurance plans are a requirement for opening an HSA and this can be difficult for some people as it is fairly expensive. HDHPs may simply not be the best decision if you have a lot of health expenses. You can also only fund your account till you’re 65 and you can’t pay for OTC drugs with an HSA. 

It is also important to note that your HSA is designed to fund medical expenses only. Hence, if you take out the money for any other reason before you’re 65, it will not only become taxable but you also pay a 20% penalty. If you do this after you’re 65, you’ll only pay the tax.