You own the account, not your employer, which means the account is fully portable and goes when and where you do. To qualify for an HSA, you must have a high-deductible health plan and no other health insurance. You must not yet qualify for Medicare, and you cannot be claimed as a dependent on someone else's tax return. A primary concern many consumers have about foregoing a preferred provider organization PPO , health maintenance organization HMO plan, or other health insurance in favor of a high-deductible health plan is that they will not be able to afford their medical expenses.
High expenses can be one reason these plans are more popular among affluent families who will benefit from the tax advantages and can afford the risk. With an HDHP, by contrast, you're spending more closely matches your actual healthcare needs. Of course, if you know your healthcare costs are likely to be high—a woman who is pregnant, for instance, or someone with a chronic medical condition—a health plan with a high deductible may not be the best choice for you.
But keep in mind that HDHPs completely cover some preventive care services before you meet your deductible. All in all, an HDHP might be more budget-friendly than you think—especially when you consider its advantages for retirement.
As mentioned above, your HSA contributions are tax-deductible until you sign up for Medicare. The contribution limits are adjusted annually for inflation. The contribution limit for a family health savings account in You can contribute up to the maximum regardless of your income, and your entire contribution is tax-deductible. You can even contribute in years when you have no income. You can also contribute if you're self-employed. This may sound counterintuitive, but we're looking at an HSA primarily as an investment tool.
Granted, the basic idea behind an HSA is to give people with a high-deductible health plan a tax break to make their out-of-pocket medical expenses more manageable. But that triple tax advantage means that the best way to use an HSA is to treat it as an investment tool that will improve your financial picture in retirement. And the best way to do that is to never spend your HSA contributions during your working years and pay cash out of pocket for your medical bills.
In other words, think of your HSA contributions the same way you think of your contributions to any other retirement account: untouchable until you retire. If you absolutely must spend some of your contributions before retirement, be sure to spend them on qualified medical expenses.
These distributions are not taxable. The key to maximizing your unspent contributions, of course, is to invest them wisely. When deciding how to invest your HSA assets, make sure to consider your portfolio as a whole so your overall diversification strategy and risk profile are where you want them to be.
Your employer might make it easy for you to open an HSA with a particular administrator, but the choice of where to put your money is yours. Let's do some simple math to see how handsomely this HSA savings and investment strategy can pay off. What about a more conservative estimate? Try out an online HSA calculator to play with the numbers for your own situation.
Here are some options for using your accumulated HSA contributions and investment returns in retirement. Remember, distributions for qualified medical expenses are not taxable, so you want to use the money exclusively for those expenses if possible. There are no required minimum distributions , so you can keep the money invested until you need it. If you do need to use the distributions for another purpose, they will be taxable. In this way, an HSA is effectively the same as a k or any other retirement account, with one key difference: There is no requirement to begin withdrawing the money at age By waiting as long as possible to spend your HSA assets, you maximize your potential investment returns and give yourself as much money as possible to work with.
You obviously want to avoid selling investments at a loss to pay for medical expenses. When you open your HSA, you will be asked to designate a beneficiary to whom any funds still in the account should go upon your death. If you're married, the best person to choose is your spouse because they can inherit the balance tax-free. As with any investment with a beneficiary, however, you should revisit your designations from time to time because death, divorce, or other life changes may alter your choices.
Your plan administrator will have a designation-of-beneficiary form you can fill out to formalize your choice. Funds captured in an HSA can help out with such skyrocketing costs. Qualified payments for which tax-free HSA withdrawals can be made include:. You can also use your HSA balance to pay for in-home nursing care, retirement community fees for lifetime care, long-term care services, nursing home fees, and meals and lodging that are necessary while obtaining medical care away from home.
You can even use your HSA for modifications, such as ramps, grab bars, and handrails, that make your home easier to use as you age. One strategy might be to bunch qualified medical costs into a single year and tap the HSA for tax-free funds to pay them, compared with withdrawing from other retirement accounts that would trigger taxable income. Also, note that there are limitations on how much you can pay tax-free for long-term care insurance based on your age.
With an HSA you are not required to take a distribution to reimburse yourself in the same year you incur a particular medical expense. So keep your receipts for all healthcare expenses you pay out of pocket after you establish your HSA. If in your later years, you find yourself with more money in your HSA than you know what to do with, you can use your HSA balance to reimburse yourself for those earlier expenses.
The strategies described in this article are based on federal tax law. Most states follow federal tax law when it comes to HSAs, but yours may not. As of the tax year, California taxes HSA contributions. With an FSA , health insurance premiums are considered a non-medical expense and are not allowed. Paying for health insurance premiums with an HSA would be considered a non-medical withdrawal. There are a handful of exceptions to the penalty for using a health savings account to pay for premiums.
In most cases, you can use HSA funds to pay for the following premiums:. These can include the following conditions:. HealthEquity calculates, compounds and credits interest monthly. The interest rate is based on your account balance. For current rates see the interest rate page in the HealthEquity online resource center.
However, if you choose to invest your account balance, those investments are not FDIC-insured. Note that a rollover will count toward your annual contribution amounts. See www. The money in your HSA can be used to pay for qualified medical expenses of any family member who qualifies as your tax dependent.
If your domestic partner meets the IRS qualifications of a tax dependent, you can legally use your HSA funds for his or her medical expenses. You can use your HSA for this expense.
You may also choose to use your personal funds to pay for this expense and reimburse yourself later. There is no claims submission deadline under the HSA.
The IRS allows you to reimburse yourself for any and all eligible claims incurred in the future. Some doctors may require that you pay up front, but most bill your insurance, and then bill you once the claim has been processed.
The HSA can be used for cosmetic surgery only if prescribed by a physician as being medically necessary. You will be able to see your account balances, HSA debit card balance, claim transactions, and more online. You also can pay providers, request reimbursements and manage your personal information.
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