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5 HSA Tips You Wish Someone Would Have Told You Sooner (#4 Will Blow Your Mind!)
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First the basics.
Whatâs an HSA?
A tax-free investment account when its proceeds are exclusively used for medical expenses.
You contribute pretax dollars, money can be invested and grow tax free, and then spend money on qualified health care expenses without paying tax on it.
Whatâs an HSA?
A tax-free investment account when its proceeds are exclusively used for medical expenses.
You contribute pretax dollars, money can be invested and grow tax free, and then spend money on qualified health care expenses without paying tax on it.
What are âqualified medical expensesâ?
IRS has a broad scope of what it considers a qualified medical expense.
Things like:
- drug prescriptions
- doc visits
IRS Pub 502 has a list of allowable medical expenses, most applying for HSA purposes
https://www.irs.gov/pub/irs-pdf/p502.pdf
IRS has a broad scope of what it considers a qualified medical expense.
Things like:
- drug prescriptions
- doc visits
IRS Pub 502 has a list of allowable medical expenses, most applying for HSA purposes
https://www.irs.gov/pub/irs-pdf/p502.pdf
I can do this already with a Flexible Spending Account (FSA). Why bother with an HSA?
FSA is a âuse it or lose itâ scenario. Meaning if you donât use the money in the account by end of the benefit year, itâs gone.
HSA **DOES NOT** have this limitation.
FSA is a âuse it or lose itâ scenario. Meaning if you donât use the money in the account by end of the benefit year, itâs gone.
HSA **DOES NOT** have this limitation.
The money you accumulate in an HSA is forever yours until you withdraw from it.
How do I become eligible for an HSA?
For that you need a High Deductible Health Plan (HDHP).
In a nutshell, itâs a plan where you pay most of your health costs until you reach the deductible limit.
Then the plan starts paying a major portion of the medical expenses.
For that you need a High Deductible Health Plan (HDHP).
In a nutshell, itâs a plan where you pay most of your health costs until you reach the deductible limit.
Then the plan starts paying a major portion of the medical expenses.
What other eligibility requirements?
> not covered on some other non-HDHP plan
> not enrolled in Medicare
> arenât claimed as a dependent on someone elseâs tax return
> must be 18 or older
> not covered on some other non-HDHP plan
> not enrolled in Medicare
> arenât claimed as a dependent on someone elseâs tax return
> must be 18 or older
Ok youâre convinced HSA is the route for you, how do you maximize it?
Tip #1:
Max out the pre-tax contribution
This allows you to lower your annual taxable income and pay lower taxes!
Tip #1:
Max out the pre-tax contribution
This allows you to lower your annual taxable income and pay lower taxes!
Tip #2:
INVEST THE MONEY!
Only 5% of HSAs invest their money. This means itâs sitting in a savings account not growing.
Average savings account interest rate: 0.05%
$10K in a savings account in 30 years would be worth $10,151
Net of $151.
Savings account ISNâT investing
INVEST THE MONEY!
Only 5% of HSAs invest their money. This means itâs sitting in a savings account not growing.
Average savings account interest rate: 0.05%
$10K in a savings account in 30 years would be worth $10,151
Net of $151.
Savings account ISNâT investing
Tip #3:
While investing in an HSA, withdrawals are tax free for qualified expenses.
However, if you donât need the
for health expenses, at the age 65, the HSA is essentially a traditional IRA.
You can withdraw without penalty for ANYTHING.
But you will pay income tax.
While investing in an HSA, withdrawals are tax free for qualified expenses.
However, if you donât need the
for health expenses, at the age 65, the HSA is essentially a traditional IRA.You can withdraw without penalty for ANYTHING.
But you will pay income tax.
Tip #4:
Pay medical expenses today out of pocket (non-HSA money).
Why would I do this?
It allows you to:
> continue growing your HSA investments
> collect those medical expenses at a later date.
Example
Pay medical expenses today out of pocket (non-HSA money).
Why would I do this?
It allows you to:
> continue growing your HSA investments
> collect those medical expenses at a later date.
Example
In the last 4 years you spent out of pocket $3000/yr on medical expenses ($3k * 4 = $12k)
All those years you maxed your HSA allowing the money to grow and compound.
This year you decide you want to go on a vacation with the family and splurge a bit.
All those years you maxed your HSA allowing the money to grow and compound.
This year you decide you want to go on a vacation with the family and splurge a bit.
You can make TAX-FREE WITHDRAWALS of the you spent on medical expenses from previous years!
The key is to maintain documentation of your healthcare expenses (EOB reports), receipts that you paid out of pocket, and previous tax returns that you didnât already collect from HSA.
you spent on medical expenses from previous years!The key is to maintain documentation of your healthcare expenses (EOB reports), receipts that you paid out of pocket, and previous tax returns that you didnât already collect from HSA.
This is to ensure if you ever got audited you can prove to the IRS that you indeed are owed this money.
The even nicer deal about this trick is there is no time restriction!
If you decided to hold out to get paid back 10,20,30 years you are allowed to do this!
The even nicer deal about this trick is there is no time restriction!
If you decided to hold out to get paid back 10,20,30 years you are allowed to do this!
Tip #5:
Some HSA employers offer HSAs that have high fees. However this doesnât mean you are stuck with that HSA.
You can do something called a trustee-to-trustee transfer or an HSA rollover.
Each have pros and cons.
Some HSA employers offer HSAs that have high fees. However this doesnât mean you are stuck with that HSA.
You can do something called a trustee-to-trustee transfer or an HSA rollover.
Each have pros and cons.
Of course this isnât everything about HSA and for some an HSA isnât the best option due to medical needs.
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