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  • Writer's pictureRyan A. Dunn, CFP®

HSAs: A Triple Tax Free 401(k) for Your Healthcare  


Key Takeaways
Health is wealth
  • Health Savings Accounts (HSAs) offer triple tax advantages: contributions are tax-deductible, money grows tax-deferred and withdrawals are tax-free. 

  • To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP) with a deductible of at least $1,600 (individual) or $3,200 (family) in 2024. 

  • There is no use-it-or-lose-it restriction for HSAs. Funds can be carried over each year with no RMDs – great for retirement income planning.

 

Most are familiar with the tax benefits of contributing to a 401(k) for retirement savings. With rising healthcare costs, the Health Savings Account (HSA) is becoming a popular savings tool. Many employers now include HSAs in their benefits package. If your employer offers an HSA, it's worth serious consideration. According to the Plan Sponsor Council of America, 80% of employers contribute to their employees' HSAs for medical expenses. Employer contributions to an HSA resemble a health-focused 401(k) match, providing extra funds that can grow through investment over time, even though they don't offer a tax deduction.

 

Think of an HSA as a safety net for medical expenses, allowing you to set aside money directly from your paycheck before taxes. An HSA can also be an attractive option for high earners. Since money is contributed pre-tax, it helps reduce taxable income. Additionally, the money isn't taxed while it’s in your account—even as it grows. Further, if you use your HSA funds for qualified medical expenses, you won't owe taxes when you take money out of the account. That’s why HSAs are considered "triple" tax-advantaged, making them even more tax-efficient than 401(k)s and IRAs. Finally, there’s no pressure to use all the money in your account during a specific calendar year or period, so there’s no “use it or lose it” provision as with flexible savings accounts. And if you change jobs, you can take your HSA with you. 

 

HSA Contribution Limits

For 2024, individuals may contribute up to $4,150 a year to their HSA, and families/married couples may contribute up to $8,300. Additionally, if you are over the age of fifty-five, you are eligible to make an additional $1,000 contribution each year to “catch up.” 


What’s Typically Covered By An HSA?

If you qualify, you can use your HSA to pay for qualified medical expenses, including copays, prescriptions, dental care, contacts and eyeglasses, bandages, X-rays, and other qualified medical expenses that aren’t covered by insurance (i.e., chiropractic) or before you’ve met

Long term care

your deductible. You can also use your HSA to pay for Medicare premiums – including Part B, Part D and Medigap. Lastly, a lesser-known benefit is that you can use your HSA to pay for long-term care premiums. 

 

Can I Use An HSA To Save For Long-Term Care? 

Yes. Many clients find long-term care insurance prohibitively expensive. By investing your HSA funds, you can potentially build up your medical spending nest egg, which can be especially valuable later in life. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need approximately $315,000 saved (after-tax) to cover health care expenses in retirement. An HSA can be a valuable financial lifeline later in life. 

 

Can I Use Money From My HSA To Pay For Non-Qualified Medical Expenses?

Starting at age 65, there is no penalty if you use HSA money for non-qualified medical expenses. Just know you’ll have to pay income tax on that money, just like you do when making withdrawals from other retirement savings vehicles, such as traditional 401(k)s or IRAs. If you’re not yet sixty-five, don’t take money out of your HSA for non-qualified expenses you'll face a 20% penalty plus any applicable taxes on those withdrawals. 

 

Who Can Contribute To An HSA?

You're eligible to contribute to an HSA only if you are covered by an HSA-eligible plan - sometimes called a High Deductible Health Plan (HDHP). According to IRS guidelines in 2024, an HDHP is a health insurance plan with a deductible of at least $1,600 if you have an individual plan or a deductible of at least $3,200 if you have a family plan.  Even after meeting the HDHP test, you can only contribute to an HSA if:


  • You aren't enrolled in a health plan sponsored by your spouse or parent that is not an HSA-eligible health plan. 

  • You're not enrolled in Medicare. 

  • You can't be claimed as a dependent on someone else's tax return. 

If your employer offers multiple types of health insurance, HSA contributions are something you should discuss to determine the best course of action for you and your family. 

 

Can I Open An HSA If I’m Self-Employed Or My Employer Doesn’t Offer One?
Self employed

Yes, if you’re also enrolled in an HDHP. In addition to being enrolled in an HDHP, you cannot be claimed as someone else’s dependent on their tax return, and you cannot have disqualifying additional medical coverage, such as a general-purpose health flexible spending account (FSA). 

 

Are HSAs Subject To Required Minimum Distributions (RMDs)?

No. Unlike 401(k)s and traditional IRAs, there are no RMDs at age 73 or any other age so your HSA can become a valuable retirement income planning tool. That’s another reason to participate in an HSA if you’re eligible and your employer offers one. 

 

What Happens If I Die And Own An HSA? 

If you are married, your spouse will inherit your HSA and be able to use it and receive the same benefits that you did. However, when a non-spouse beneficiary inherits an HSA, the entire amount needs to be distributed immediately and will be considered income to the beneficiary. However, they will not have to pay the 20% early withdrawal penalty. So, it is important to draw as much from the HSA account as possible later in life. 

  

Conclusion 

If you or someone close to you has questions about tax-smart saving for healthcare or other large out-of-pocket expenses, please don’t hesitate to reach out. We’ve helped many clients like you in similar situations

 



 

RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth 

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