Health Savings Accounts (HSAs) are powerful tools to save for medical expenses in a tax efficient manner. HSA contributions are tax deductible, earnings grow tax-free inside the account, and distributions are tax-free if used for qualified health care expenses.
HSA contributions are only available to those who fall under a High Deductible Health Plan (HDHP), which has a higher annual deductible than typical health plans and certain maximum out-of-pocket expenses. Reach out to your health insurance provider to determine if your plan qualifies as an HDHP.
HSA Catch-up
Standard HSA contribution limits in 2023 are $3,850 for an individual and $7,750 for a family. However, once you hit age 55, you are eligible to make an additional $1,000 contribution to the HSA plan as an individual; if both spouses in the family are over 55 and not yet enrolled in Medicare, a catch-up total of $2,000 is added to the annual contribution limit.
One key caveat to the spousal catch-up contribution is that each spouse must have their own HSA to be eligible. For example, if all HSA family contributions are made into a single-family HSA, only one spouse can be eligible for the $1,000 catch-up contribution, even if both spouses are over age 55. On the contrary, if both spouses have their own HSA account, then both spouses are eligible for a $1,000 catch-up contribution.
HSA Tax Savings:
HSAs can be utilized as part of an efficient tax strategy within your overall financial plan, and they become even more attractive once you are eligible to make additional catch-up contributions.
Increasing HSA contributions can be used to somewhat offset income in higher-earning years. We typically recommend that funds in HSA accounts be left in cash or a cash alternative up to an amount that will cover your out-of-pocket maximum. Any amounts over that could be invested with an eye towards long-term growth to cover future years. The potential of investing for future gains within an HSA and the compounding effect of returns could leave a healthy balance to cover ever-increasing later life medical expenses in a tax-efficient manner.
We find HSAs to be a key recommendation to clients, when eligible under their health insurance plan. Their triple-tax advantage strategy (tax-deductible contributions, tax-free gains, non-taxable withdrawals for qualified medical expenses) is the gold standard of minimizing long-term taxes for any investor. As always, it is best to manage HSA accounts within the context of an overall financial plan.
Source: IRS.Gov https://www.irs.gov/publications/p969
.png)
