"Why do you have to make everything so hard? I've spent my whole life trying to make things good for you… and you just push me away. You don't call, you don't write, you don't let me in. I don't know what I did to make you hate me so much… I love you, and I don't even know who you are half the time!"
What a pity. That's what your HSA said to you the other day - and it's definitely not a quote from the play Terms of Endearment.
The Health Savings Account is likely the most criminally underrated account in the tax code. It's a triple-threat for taxes, getting special treatment that no other account type gets, and it remains flexible and privileged even throughout retirement. Let's recapitulate the highlights and proper use of a Health Savings Account, and then I'll describe how you can continue using the Health Savings Account in retirement to get massive tax benefits.
What is an HSA?
An HSA (Health Savings Account) is an extremely tax-advantaged investment account designed to help incentivize saving for health-related expenses.
What are the Tax Advantages of an HSA?
The three tax advantages of an HSA are:
- Income deduction upon funding
- Tax-deferral of income, dividends, and gains
- Tax-free withdrawals if used for qualified expenses
Health Savings Accounts have uniquely tax-advantaged privileges not enjoyed by other investment accounts. When you deposit money into an HSA, the amount you deposited is deducted from your taxable income for the year. Once the money is in the account and invested, dividends, income, and gains are not taxed when incurred; the taxes are deferred. Then, when the time comes to spend money from your HSA, the funds are still not taxed, so long as you use them for qualified expenses related to the betterment of your health.
The CARES Act greatly expanded the allowable uses for HSA funds. You now use your HSA to pay for dental and orthodontic work, vision care including glasses and contact lenses, even things like medically-necessary chiropractic work, therapy, over-the-counter medicines, almost anything that is used for the betterment of your health.
Most of these are things that people would be spending money on anyway, so rather than using your precious after-tax dollars, you might as well put the money in the HSA, get the deduction, let it grow tax-free, and then use those same dollars, but with all their newly accumulated tax advantages.
Who Can Open an HSA?
As long as you were in a qualified High-Deductible Healthcare Plan (HDHP) as of the first of the month, you are eligible to open an HSA.
Health Savings Accounts are designed to bridge the coverage gap for participants in a High-Deductible Healthcare Plan, which is a specific designation defined by the IRS, characterized by meeting both of the following criteria:
- Annual deductible is at least $1,650 for individual participants, or $3,300 for family plans.
- Annual out-of-pocket expenses are no more than $8,300 for individual participants, or $16,600 for family plans.
If you had previously opened an HSA but no longer have qualifying HDHP coverage, you can continue to use your HSA funds, but you can no longer contribute new funds to it.
How Do You Use Your HSA Funds?
There are two ways to use your HSA funds. You can either reimburse yourself for expenses by transferring from your HSA to your bank account, or some HSA providers will offer a debit card that links directly to the HSA.
When possible, always choose the latter. Using the debit card creates a digital paper trail for your transaction history. If you get audited or need to show proof that you used your HSA funds appropriately, it will be much easier to get that proof if you used the HSA card.
Can I Use HSA Funds for Non-Health Expenses?
While you can use HSA funds for non-health expenses, you should never do so if you can avoid it. If you cannot prove that your spending was for allowed purchases, the misappropriated funds will lose their tax-advantaged status (you will owe ordinary income taxes on whatever was spent), but you will also be served a steep 20% penalty, courtesy of your friends at the IRS.
What Can I Use My HSA Funds For?
HSA funds must be for the betterment of one's health. This is a broad definition, and includes things that one would likely expect, like medical services, doctor's visits, co-pays, emergency room, ambulance rides, and prescription medicines. It also includes things that might surprise you, like vision exams, glasses, contacts, dental and orthodontic expenses, childbirth and fertility treatments, therapy, and even over-the-counter medicine.
It also includes stuff that might shock you, like male and female birth control and reproductive health, breastfeeding supplies, wheelchairs, crutches, hearing aids, first-aid kits, most COBRA and Medicare premiums, it's hard to overstate how much is included now. If you need to travel for your healthcare, you can deduct the travel and lodging expenses, too!
For a full list of approved HSA expenses, consider going straight to the source, and consulting IRS publication 969.
In my opinion, just about everyone that qualifies to have an HSA should be using it, and they should be using it a lot. Most people will be spending money on these expenses anyway; the choice is therefore in their hands: to pay for these things with after-tax dollars, or pay for them with triple-tax advantaged HSA dollars.
What Should I Do With HSA Funds After I Retire?
One thing I hear from clients all the time is that they are wary of over-funding their HSAs. They tell me they don't want to put too much money in a health savings account because the investments might reach 'escape velocity,' and they will be stuck with an albatross of money that is only usable for healthcare.
I can empathize with the concern, but I think people drastically underestimate how many types of purchases they can use their HSA for. Additionally, many people don't realize that if you attain age 65 and still have funds in your HSA account, you can essentially opt to treat your HSA almost exactly like an IRA. Recall that you already received a tax deduction for contributed funds, your gains have all been deferred, and once you are 65, withdrawals will cause you to owe ordinary income tax, but no additional penalties.
That makes HSAs a great supplementary not-a-retirement plan for those who might have too high an income to contribute to Roth, have too high an income to deduct their IRA contributions, or have already maxed out their IRAs, 401(k) plans, etc. The HSA is not a retirement plan, of course, but keep in mind that medical spending tends to only go up with age – just because you have retired does not mean you won't need this money for medical spending, in fact it's quite the opposite.
This puts the intelligent HSA-user at a massive advantage, and creates a win-win situation.
When you contribute, you get tax benefits now.
If you use the money for health-related spending, great! – you will get more tax benefits when you spend the money.
If you don't end up spending all the money, no worries! – consider it a supplementary IRA! Or, use the funds for your Medicare premiums and future medical expenses.
If you find yourself wondering whether you're overfunding your HSA, or how it might fit into your robust retirement plan, feel free to set up a free consultation with one of our advisors. You can give us a call at (512) 265-5000, or get in touch at https://iwanttoretirewell.com/contact-us.
