Not only have many people never heard of health savings accounts (HSAs), even those who have, may never have thought of them as a potentially great way to save for the future.
HSAs can, under the right circumstances, be quite conducive to a tax-friendly means of stashing some money away. While there are more well-known saving plans, such as 401(k)s, IRAs and other retirement accounts, an HSA might also work for you, if you’re fairly healthy and have a high deductible health insurance plan.
An HSA is for people covered by a high-deductible health insurance plan. Its advantage is that, unlike other savings plans, it does not have income limits. For high income earners who may not qualify for Roth or traditional IRA contributions, a health savings account has no income restrictions when it comes to contributions. It does, however, have contribution limits. For 2022, the annual inflation-adjusted limit on HSA contributions will be $3,650 for individuals and $7,300 for families, a slight increase over contribution limits for 2021.
It is important to note that HSAs are available exclusively to those with high-deductible health insurance plans and, as such, you need to consider your health needs before choosing what is best for you and your family. Typically, high-deductible plans are best suited to those in good health, with low healthcare expenses, so it makes the most sense to take advantage of an HSA when a high-deductible plan is in your best interest.
You may want to think of your HSA as a type of medical retirement plan. Unlike a flexible spending account, a healthcare saving plan where the money deducted from your paycheck must be used by the end of year, funds in an HSA can be rolled over each year. That, along with its tax benefits and flexibility, makes an HSA a great long-term investment strategy.
Consider too, the tax benefits of an HSA over other retirement savings plans. It offers tax deductions on contributions and tax-deferred growth. Additionally, you can invest the contributions rather than withdrawing them for current medical costs. You can contribute to an HSA until you enroll in Medicare. After that consider using other resources first to pay routine medical expenses. That way the funds in your HSA can continue to grow tax-free until you need to tap them for big ticket items like long-term care.
As always, we are here to advise you on all your financial and tax planning needs. Please contact one of our tax advisors with any questions you may have about HSAs.