I read a great article recently on Health Savings Accounts (HSAs) and thought I would share some things I learned. Who says you can’t teach an old dog new tricks.
Just as a reminder, I like to refer to HSAs as the triple crown of the investing world. Contributions go in pre-tax, no taxes during growth, and no taxes on distributions as long as they are for medical-related expenses. You must be in a high-deductible healthcare plan in order to qualify.
I won’t go through all the specifics on how much you can contribute and catch-ups. That is a conversation I am sure your advisor is having with you. Well, assuming they recommend HSAs, which some do not simply because they do not get paid on them. But I digress.
The important thing to know is this is one of the most powerful tools for retirement savings because of the triple tax savings components. Study after study shows you should max out your HSA before you do your 401k. Of course, this assumes you do not tap the HSA funds until you are in retirement. I also won’t go through that again as I covered it before and have the same conversation with my clients.
First thing I did not realize is you can take distributions from HSAs for non-medical expenses in retirement. Now, I figured there was an option to do this but there would be a penalty. No penalty with this type of distribution. However, it is treated like a distribution from your IRA – taxed like ordinary income. My point mentioning this fact is some people may think HSA balances are like Flexible Savings/Spending Accounts (FSAs), which have a use-it or lose-it structure. So, you can get your money out and pay income taxes on it like your IRA distribution.
Here is the big one I learned. Children may open HSAs even if they are under their parent’s health coverage. Let me provide an example. Your son just graduated, is working at age 23, but is still under your high deductible health plan, and is NOT declared as a dependent on your tax return. He can open his own HSA and fund it to the max family amount of $7,750, while you still can max out your amount too. AND, he does not have to fund it himself. You can do that for him.
Last thing I picked up is the final funding date for HSA contributions is April 15th. Or, if you file your taxes before April 15th it is the filing date. You will have had to set up the HSA before the end of the previous year, but funding can be delayed. I guess if you want to see whether you will have expenses you think are worth covering.
A couple of other random reminders with HSAs. They are totally portable so they can follow you from job to job. Eligible expenses are pretty wide. Things like contact solution is an eligible expense. Your HSA will require a certain amount to stay in cash, but you should be able to invest the balance. This is something I recommend since it will never be taxed again. Also there is a catch-up once you hit 55.
Final thing to mention. You cannot inherit an HSA unless you are a spouse. If there is a balance left your executor has up to a year to use it to pay for medical expenses, as long as you can verify them.
Anyways, just wanted to share some more HSA tricks I was not aware of until recently. If any of these situations apply to you I would definitely talk with your CFP® to see if it makes sense to use an HSA. Heck, even if not you may still want to find out if a Health Savings Account is the way to go because of it’s triple tax-free component.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.