An HSA offers a triple tax advantage, and can therefore become a significant wealth-building tool for account holders. The three tax benefits include:

1. Contributions made via payroll deductions use pre-tax dollars and contributions you make directly to your account are eligible tax deductions.
2. All interest and earnings from your account grow tax-free.
3. Withdrawals for qualified medical expenses are tax-free.

Saving for current and future medical expenses may not be the most attractive thing for anyone, but having a pool of tax-free money set aside specifically to cover those expenses can make tax and withdrawal planning in retirement much simpler.

What is a Health Savings Account? A Health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must meet the following qualifications to contribute to an HSA:

• You are covered under a high deductible health plan (HDHP) on the first day of the month.
• You have no other health coverage except what is permitted under health coverage.
• You are not enrolled in Medicare.
• You cannot be claimed as a dependent on someone else’s tax return.

5 Ways to Maximize HSA Benefits

1. Contribute early and often

HSA funds can be invested just like any other investment account. Opening an HSA and making annual contributions will promote compound growth, allowing your investments to cover medical expenses you may come across later in life. In 2023, you can contribute up to $3,650 with self-only HDHP coverage and up to $7,750 with family HDHP coverage. Additionally account holders age 55 and older can contribute an additional $1,000 catch up payment. This may seem minimal, but compounded over decades, these contributions can offer substantial coverage during retirement.

2. HSAs are fully portable

Many assets are often left behind when an employee leaves their current employer. However, with an HSA the account holder can move their account away from the provider established by their employer.  The portability of an HSA also allows the account holder to transfer funds to a more favorable provider to expand investment options, reduce fees, or even earn interest on any portion kept in cash.

3. There are no time limits on HSA reimbursements

This is where HSAs really become wealth-building tools. Deferring reimbursement of medical expenses allows the contributions to an HSA to grow tax-free, like contributions to a Roth IRA. Once an HSA is established and funded, it should be a habit to track medical expenses for future withdrawals up to the account balance. Reimbursements may be claimed decades later after allowing your contributions to compound and when you may potentially be earning less income than in previous years.

The key to this strategy is tracking all medical expenses incurred over the years after opening your HSA account. The burden of recordkeeping with HSAs falls on the account holder, however it is important to keep accurate records pending potential IRS inquiry. Recordkeeping has also become more attainable through banking apps where you can upload pictures of your receipts to track everything within the same app you would be investing your contributions and viewing your balance.

Records should be kept of over the counter medicines, menstrual products, sunscreen, and other everyday expenses that most people don’t consider to be medical expenses.

4. HSAs can be used to pay certain insurance premiums.

HSA funds cannot be used to pay for health insurance purchased through the government marketplace, but other types of insurance premiums can be paid in certain circumstances. The IRS allows HSA distributions to cover Medicare premiums. Up to certain limits, long term care insurance premiums are eligible HSA expenses, bringing some relief from the rising costs of this coverage as account holder’s age. COBRA, or health care continuation coverage, premiums are eligible HSA expenses.

5. HSAs are considered trusts that pass directly to the designated beneficiary.

It is vital for the account holder to keep up to date beneficiary information to ensure remaining assets are transferred to the desired party upon the passing of the account holder. HSAs may be great tools for building personal wealth, however, they are not efficient in transferring wealth to descendants.

Naming your spouse as beneficiary of an HSA allows the surviving spouse to continue to use the account in its tax free status for the rest of their life, but when a non-spouse beneficiary is named, an HSA is immediately payable and taxable. This is why account holders need to make a conscious effort to exhaust funds prior to death. And account holders whom would prefer to donate their HSA funds may name a charitable organization as the beneficiary and they would receive the funds tax free.

As a person ages, medical expenses tend to increase, particularly when reaching retirement age and beyond. Therefore, contributing to an HSA early and allowing it to accumulate over a long period can contribute greatly to securing your financial future. HSAs are valuable tools that everyone should take into consideration when addressing their health and financial wellness needs. When used intentionally, HSAs can prove to be incredibly effective in building personal wealth and funding health expenses long after retirement.

Please contact your tax advisor at Dermody, Burke & Brown for any questions you may have regarding this article.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.