One of my favorite financial accounts is the health savings account or HSA. Our family has been using one for as many years as we were eligible. It’s a great help if you need access to the funds and it’s a tool you can use to save money for retirement.
An HSA has been described as offering triple tax benefits. One, contributions are deductible. Two, there is no taxation on funds while they are in the HSA and, three, distributions taken for qualified medical expenses are tax-free. Not a bad deal!
An HSA can help you stretch your health care dollars and build your retirement savings at the same time, as long as you’re eligible for one and you spend the money in your HSA on eligible expenses.
Here’s a look at the benefits of HAS:
HSAs are tax-free
Putting money in a health savings account is one of the very few ways you can entirely avoid paying any taxes on that money — ever.
Money in tax-advantaged accounts like 401(k)s and individual retirement accounts (IRAs) might grow tax-free, but you will pay taxes on at least the principal at some point.
With an HSA, though, you get a tax deduction for the money you put into the account. Then, the earnings grow tax-free. And, as long as you use it for qualified health care expenses, you don’t pay taxes on the money you withdraw from the account. It’s truly tax-free.
HSAs are more versatile than FSAs
A health flexible spending account (FSA) is another type of tax-advantaged account for stretching health care dollars, but it has a big downside.
FSAs are subject to a use-or-lose provision. That means workers generally must spend any money in their FSAs within their health insurance plan year or else lose the money.
With an HSA, however, your money remains in the account — and thus can grow — year after year.
You can invest the money in your HSA
It’s generally possible to invest the money that’s in your HSA so it can grow faster, though investment options may vary depending on where you open your HSA.
I invest a portion of my HSA in an all-market index fund to help me better reach my goal of using my HSA as a supplemental retirement account.
How to open an HSA
Opening an HSA is fairly straightforward — as long as you qualify for one. The main requirement to qualify, according to the IRS, is that you are covered by a high-deductible health insurance plan or "HDHP plan"
To open an HSA, you pick a custodian, meaning an institution that offers HSAs.
HSA, Retirement & Medicare
HSA Benefits Continue
First, let’s talk about what stays the same.
When you reach age 65, you can still access your HSA both tax and penalty-free to pay for qualified medical expenses. Generally, qualified medical expenses are those that qualify for the medical expense deduction. This includes most medical, dental, vision, and chiropractic expenses. You may take tax-and penalty-free distributions to pay for your spouse or dependents’ medical expenses as well as your own. You can even take a tax- and penalty-free distribution this year to reimburse yourself for medical expenses in a previous year, as long as the expenses were incurred after your HSA was established. Expanded Benefits After Age 65 At 65, you will also gain some new benefits with your HSA. Certain insurance premiums can be paid tax-free with HSA distributions after you reach age 65 and enroll in Medicare. You can pay for all Medicare premiums except Medigap. Employee payments of premiums for employer health insurance plans also qualify. You may also pay premiums for your spouse as long as you are age 65.
Distributions that you take from your HSA after age 65 are never subject to penalty. What you use the funds for does not matter. All HSA distributions after age 65 are penalty-free, even if the funds are not used for qualified health expenses. However, if you take a distribution that is not used for qualified medical expenses, it will be taxable.
HSAs and Medicare When it comes to making contributions to your HSA when you reach age 65, things can get a little tricky. This is due to the interaction of the HSA rules with Medicare. To be eligible to contribute to an HSA, you must have a High Deductible Health Plan (HDHP). You cannot have coverage under another plan that is not an HDHP. Because Medicare is not an HDHP, you cannot contribute to your HSA if you are enrolled in Medicare. Enrollment in any Medicare coverage (Parts A, B, C, D, or Medigap) will end HSA eligibility. Keep in mind that if you apply for Social Security benefits at age 65, you will automatically be enrolled in Medicare Part A.
You lose your eligibility to make an HSA contribution as of the first day of the month you turn age 65 and enroll in Medicare. You can make a pro-rated contribution for the year to your HSA for the months before you became ineligible due to your enrollment in Medicare. This contribution can be made until the HSA contribution deadline, which is generally April 15, of the following year.
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