Health Savings Account Basics

A Health Savings Account (HSA) is a tax advantage savings account that is created for people who have high-deductible health insurance plans.  High-deductible insurance plans are usually accompanied with lower premiums. Lower premiums mean the covered employee pays lower monthly fees, however the caveat is that the employee is responsible for the higher out-of-pocket medical expenses. Employer and employee can contribute to the HSA, which then the funds can be used towards qualified medical expenses. Some examples of qualified medical expenses include the following; dental and vision care, prescription and over-the-counter medications, childcare, transportation and parking expenses to and from medical appointments, and service animals.   

Contributions 

The IRS allows a yearly max contribution to an HSA to be $3,650 for an individual or $7,300 for a family.  If you are over 55 years of age, you are allotted an extra $1,000 per year.  These limits include the contributions from both the employer and the employee.  

Once you enroll in Medicare, you are no longer permitted to contribute to an HSA, however, you are still allowed to withdraw tax-free distributions from the existing account for qualified medical expenses.  

 

Tax Benefit 

People who participate in HSA’s benefit from a triple tax advantage:  

  1. Contributions are tax-deductible up to the IRS limit. If payroll deduction is an option, these contributions are typically made pre-tax. 
  2. Using HSA dollars to pay for qualified medical expenses is free from federal income taxes.  
  3. When you start to invest your HSA dollars, any growth is free from Federal Income Taxes.   

When to Invest 

When looking at the past 30-year performance of the stock market, it’s important to consider when to start investing HSA funds. Since 1991, the stock market has been positive 83% of the time and negative 17% of the time.  It would be detrimental for an individual to make withdraws from their invested portion when the market is down. This would result in negative compound interest.  For this reason, we, at Whitaker-Myers Wealth Managers, recommend keeping the yearly maximum out-of-pocket coverage in cash within the HSA.    

How to Invest 

At Whitaker-Myers Wealth Managers, we keep your HSA diversified following Dave Ramseys’ principles; 25% Growth, 25% Growth & Income, 25% Aggressive Growth, and 25% International.   

Pros of HSA

  • Contributions are payroll deducted and excluded from taxable income 
  • Earnings on the account are tax-FREE (if used for qualified medical expenses) 
  • Can invest money within the HSA into Mutual Funds 
  • Contributions do not need to be used within the same year 
  • HSA can be transferred to a surviving spouse tax-free upon the account holder’s death   

Cons of HSA 

  • Must have a high-deductible Insurance plan 
  • Must have medical emergency fund to cover higher out of pocket medical expenses  
  • Certain filing needs to be completed, which is where using a Tax ELP such as Whitaker- Myers, can help you prepare.   

Fidelity 

At Whitaker-Myers Wealth Managers, we typically recommend clients establish their Health Savings Account at Fidelity, since Schwab does not have a Health Savings Account option. We can help manage the Fidelity Health Savings Account through our Pontera platform.  

 

Author: Logan Doup