You may have heard of health savings accounts but are you using them to your advantage? Read on for frequently asked questions and answers.
1. What is a health savings account?
A health savings account (HSA) is a personal savings vehicle that lets you set aside money to pay for qualified medical expenses. HSAs are triple tax advantaged, meaning the money you contribute to the account reduces your taxable income, grows tax free, and can be distributed tax free for qualified expenses. Only employers and participants enrolled in a high deductible health plan can contribute. Once contributions are made, the funds inside the HSA are yours and are freely transferable throughout your career with no expiration. If you switch employers or health plans, the HSA is portable and goes with you.
2. How much can I contribute?
For 2024, you can contribute $4,150 per year for individual coverage or $8,300 for family coverage. Those age 55 and older can contribute an additional $1,000 as a catch-up contribution. Don’t be afraid to max out your contribution, as you can still take distributions from your HSA if you go off a high deductible health plan or once you turn age 65 and are enrolled in Medicare — you just can’t contribute to it anymore.
3. What are the investment options?
Once your HSA reaches a certain threshold (e.g., $2,000), you can invest the funds the same way you invest in your 401(k) or other investment account. HSA providers typically offer several investment options including money market funds, stocks, bonds, and mutual funds. A financial professional can help determine an appropriate allocation based on your cash flow, expense needs, and risk tolerance.
4. What expenses are qualified?
More than you might expect! In addition to copays, deductibles, and coinsurance, other items such as orthodontics, chiropractors, sunscreen, and cold medicine may be eligible. You can look up qualified expenses online. If you shop at a major retailer like CVS or Amazon, they will indicate if an item is HSA qualified, and you can pay for that item with your HSA debit card.
5. Should I make the maximum contribution to my HSA or retirement plan first?
This will vary from family to family and depends on your medical expenses, job security, disability insurance, unemployment insurance, value of emergency fund, and investment options in your HSA vs. retirement plan. For example, if you were laid off and need to use one of these accounts to pay rent or other bills, your retirement plan is more flexible than an HSA when it comes to non-qualified expenses. HSAs have a 20% penalty vs. 10% for retirement plans. 401(k)s may also offer loans and you can withdraw from IRAs for college or a first-time home purchase (limited to $10,000). Starting at age 59½, you can withdraw from retirement plans for any reason, and starting at age 65, you can withdraw from HSAs for any reason. Families who do not anticipate any non-qualified early withdrawals before age 65 may want to maximize their HSA first.
This material is being provided for educational and informational purposes only. D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Information contained herein has been obtained by sources we consider reliable but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original article. These opinions are subject to change at any time without notice. Copyright D.A. Davidson & Co., 2024. All rights reserved. Member FINRA and SIPC.