Healthcare can be one of retirement's largest expenses. A Health Savings Account (HSA) provides a tax advantaged way to save for health care cost in retirement. You receive a tax deduction when you make the contribution, assets grow tax deferred, and, if used for qualified medical expenses, distributions are tax free.
HSA Tax Benefits
A large draw for many are the tax benefits inherent to HSAs:
- Contributions through an employer are always pretax
- You can invest the funds after your account balance reaches a certain level
- Distributions for qualified health expenses aren’t taxable
Additionally, unlike a Flexible Spending Account (FSA), funded with pretax dollars but must be used by a specific deadline, HSA contributions can remain in your account to be used for future medical bills at any time. In short, this means there is no “use it or lose it” penalty.2
Remember that if you spend your HSA funds on non-qualified expenses before age 65, you may be required to pay ordinary income tax and a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for non-qualified expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.
HSA Contribution Limits for 2022
HSA contribution limits are adjusted annually for inflation. For 2022, the self-only contribution limit is $3,650 or $7,300 for families. The contribution limit refers to contributions from both employers and employees (or family members). The tax-filing deadline is also the deadline for prior year contributions.
HSA Contribution Limits for 2023
For 2023, the self-only contribution limit is $3,850 or $7,750 for families. The contribution limit refers to contributions from both employers and employees (or family members).
How to use your HSA
The IRS or your HSA provider are great sources when getting started. For example, the IRS recently issued a reminder that at-home covid tests, face masks, and sanitizing wipes can all be purchased or qualify for reimbursement through an HSA. In addition, the IRS offers an interactive assessment tool that can take the guesswork out of what qualifies as an HSA-friendly expense.4
“Super” HSA
Super HSA is a term used to describe a technique that allows families with adult children who are no longer tax dependents to save beyond the annual family limit. This technique works for children covered by the family HSA-eligible insurance plan.
If you have an HSA, you can keep your healthcare dependents on your high-deductible health plan (HDHP) until they turn 26. However, the IRS only allows you to use your own HSA funds to pay for qualified medical expenses for any dependents you claim on your tax return. This means that once your child turns 24, they may still be on your HDHP, but you can’t use your HSA for their medical expenses.
Once your child is no longer your tax dependent, they are eligible to open their own HSA, even if they are still enrolled in your HDHP. Since they are part of your family HDHP, they can contribute to the family maximum. Additionally, you can contribute to your child’s HSA on their behalf if you choose to.
It is important to note, though, if you contribute to your child’s HSA, your child will receive the tax benefits for those contributions – not the parent.
- Marketwatch.com, March 17, 2021
- IRS.gov, May 2021
- IRS.gov, September 10, 2021
Disclosure:
Investment advisory services offered through RMR Wealth Builders, Inc. RMR Wealth Builders, Inc. is not engaged in the practice of law or accounting. The information in this material is not intended as tax or legal advice. All investment strategies have the potential for profit or loss.
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