Understanding HSAs

A healthcare savings account can be a valuable addition to your overall financial picture.

26 Sep 2019

Questions you can ask your UBS Financial Advisor

  • Why should you consider an HSA?
  • Who qualifies for an HSA?
  • What are the tax benefits of an HSA?

Healthcare is becoming more expensive, and as a savvy investor, you might be wondering how to cover the costs while also planning for the future. A healthcare savings account (HSA) may be an answer.

An HSA is becoming a more common way to set aside money for qualified medical expenses and save for retirement, according to Ellen Breslow, Managing Partner of EAB Healthworks. However, there are specific rules around qualifying for and contributing to an HSA that you need to be aware of.

What is an HSA?

An HSA is a tax-advantaged savings account you can use to pay for non-reimbursable medical expenses. Individuals can contribute up to $3,500 a year in 2019, whereas families can contribute up to $7,000 a year . Brewslow notes that, "Unlike flexible savings accounts (FSAs) where you have [to spend funds] by the end of the year, that is not the case with [HSAs], which makes it even more attractive to continue to accumulate funds."

You can access the funds immediately to pay for qualified medical expenses, ranging from co-payments, deductibles and Medicare premiums to hospital bills, dental services and vision care.

HSAs are "kind of like IRAs," says Breslow. HSA funds can be used to supplement retirement savings. Many HSAs offer a self-directed brokerage where you can invest in stocks, ETFs and mutual funds.

Who qualifies for an HSA?

Anyone with a high-deductible healthcare plan (HDHP) can open an HSA. For 2019, the IRS defines a HDHP for an individual as a plan with a deductible of at least $1,350 and an out-of-pocket maximum of $6,750. For families, the deductible must be at least $2,700 and $13,500 for the out-of-pocket maximum.

You can't contribute to an HSA if you're listed as a dependent on anyone's tax returns or if you're enrolled in Medicare.

"[One of the main] benefits of an [HSA] is the employer matching contribution," says Breslow. Many employers offer HSAs with contribution matching. Breslow says that matching up to $1,000 is common.

If you don't like your employer's HSA offering, you can transfer your account to a new HSA administrator. You can also open an HSA independently if you enrolled in a HDHP through a healthcare exchange.

What are the tax benefits of an HSA?

HSAs offer a triple tax advantage:

  1. Contributions are tax-deductible or pretax (if made through a payroll deduction)
  2. The interest earned is tax-free
  3. Withdrawals for qualified medical expenses are tax-free

It's important to designate a beneficiary for your HSA, so that your spouse or partner can utilize the funds after you pass. Otherwise, the money enters probate and may be distributed according to state law if no will exists.

Do HSAs have fees?

Do you research before selecting an HSA administrator. Breslow advises clients to be aware that some HSAs come with incidental fees each time you make a distribution; others have a monthly maintenance fee. If you withdrawal money for non-qualified medical expenses, you could face a 20 percent penalty and income tax on the distribution.

An HSA can be a valuable addition to your overall financial picture. Explore your options and take stock of your medical expenses to see what makes sense for you and your family.

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