Health Savings Accounts (HSAs) offer myriad benefits, from their triple-tax advantage to assisting those with high-deductible health plans (HDHPs) to cover out-of-pocket expenses. But the thing that may surprise you most is that an HSA is more than just a healthcare spending account. As MarketWatch puts it, “it practically has superpowers!”
Since their inception in 2003, HSAs have experienced rapid growth – partly due to pre-retirees wanting to take control of rising health care costs but also because more employers have switched to HDHPs for coverage.
Despite their many advantages, we still hear from folks who think only of HSAs as spending accounts or something that leaves them with hefty medical costs because they chose high-deductible health insurance coverage. They don’t understand how to put this relatively simple tool to work for them.
No longer are HSAs just products to cover current healthcare expenses, but they’re tools to save for healthcare and other costs in retirement. Read on to discover the most common myths about Healthcare Savings Accounts.
Table of Contents
- Myth #1: It’s “use-it-or-lose-it”
- Myth #2: You can’t use the money in your HSA once you’ve enrolled in Medicare
- Myth #3: Your family can only benefit from the HSA if covered by your health plan
- Myth #4: HSAs are too complicated
- Myth #5: The funds can only be used to cover medical expenses
- Myth #6: HSAs are deposit accounts
Myth #1: It’s “use-it-or-lose-it”
Unlike the Flexible Spending Account (FSA), Health Savings Accounts allow you to transfer any unused balance each year. There is no time cap, so why not treat it like a long-term savings account that can be accessed for medical expenses at any time? These funds can even be used for costs associated with caring for elderly, tax-dependent parents in the future.
You can also request a rollover of your HSA if you change jobs (the IRS will allow this once every 12 months). This may get tricky if you’re no longer enrolled in an HDHP, so to maintain its tax-free benefits, check in with a specialist before making any changes to your existing Health Savings Account. This makes your HSA more like an IRA from a portability standpoint.
Myth #2: You can’t use the money in your HSA once you’ve enrolled in Medicare
Because Medicare is not an HSA-qualified health plan, you can no longer contribute once you’ve enrolled in Medicare. However, you can continue to use these funds tax-free for out-of-pocket medical expenses and other eligible costs not covered by insurance. This includes vision, hearing, dental care, and copays for prescription drugs.
Myth #3: Your family can only benefit from the HSA if covered by your health plan
The rules for contributing to an HSA differ from those surrounding the use of the funds. Currently, you can contribute up to $3,650 for individual plans and up to $7,300 for family plans. Those over 55 can “catch up” with an additional contribution of up to $1,000. Regardless of your individual or family health coverage status, you can still use the tax-free HSA funds for every tax-dependent member of your family – even those covered under another policy.
Alternatively, suppose you have non-tax-dependents on your health coverage (a college student who files their own taxes, for example). In that case, the HSA funds will be unavailable to them. However, please use this opportunity to encourage them to start their own HSA. They can remain enrolled on your HDHP while contributing to their own HSA, setting up a successful future at a young age.
Myth #4: HSAs are too complicated
Actually, Health Savings Accounts are a relatively simple tool! They provide a level of flexibility and ownership that help those invested in them to cover current and future out-of-pocket medical expenses with pre-tax dollars. They’re basically a savings account with several tax advantages.
Myth #5: The funds can only be used to cover medical expenses
Well, this is partially true. You may face a tax penalty if you use your HSA funds for something other than medical expenses before age 65. Those 65 and older can use the funds for anything, except income taxes will need to be paid.
As long as you keep your receipts, you may benefit from a few more uncommon tactics. If it makes sense for you, pay out-of-pocket for medical expenses you can afford to cover now and leave your tax-free HSA funds intact (or invested) until you need them. One of the best things about an HSA is that it’s up to you to decide when to reimburse yourself for your healthcare expenses – there is no time limit. Remember that record keeping is vital if you do this. As long as you have an HSA when the costs are incurred, you can utilize HSA funds at any time to reimburse yourself.
Let’s say you needed a minor medical procedure and had the cash to cover it. Then a few months later, you endured unforeseen home repairs and needed to withdraw funds from your HSA to cover them. This shouldn’t be a problem if you possess the proper receipts and documentation from your medical procedure.
Myth #6: HSAs are deposit accounts
Deposit accounts are an option, but the funds can also be invested in riskier assets like the stock market. Especially, for people who are depositing funds into HSAs for the tax break and don’t intend to use the money in the short term, it would be smart to invest and try to achieve some level of growth over longer periods of time. Another strategy is to split the purpose of your HSA account. Use a portion for current health care expenses and keep that amount in a deposit account, then have the rest invested for future expenses.
An HSA is one of the best tax-advantaged investment tools you can use. And, if you take steps to ensure that these funds are well invested, you will accrue quite a bit in your Health Savings Account by retirement. Medical expenses often increase as we age, so if you qualify, begin securing your financial future with a Health Savings Account as early as possible. And if you still need help navigating the world of HSAs, reach out to us at (608) 563-2437 or info@uncommoncentsinvesting.com!
