Understanding the Benefits of Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) offer eligible individuals a smart way to reduce out-of-pocket health care costs and federal tax bills. If you are looking to maximize your tax breaks, now is a great time to consider opening an HSA, provided you qualify.

Not only are HSAs effective tools for managing health care expenses, but they can also enhance your retirement savings and offer estate planning advantages.

What is an HSA?

An HSA is a tax-advantaged savings account similar to a traditional IRA or 401(k) plan, funded with pretax dollars. The funds can be withdrawn tax-free to pay for a variety of qualified medical expenses. Withdrawals for nonqualified expenses are taxable and subject to a penalty if you are under 65.

Eligibility Requirements

To contribute, you must be enrolled in a high-deductible health plan (HDHP). For 2024, an HDHP is defined as a plan with a minimum deductible of $1,600 for individuals ($3,200 for family coverage) and maximum out-of-pocket expenses of $8,050 for individuals ($16,100 for family coverage).

Additionally, you must not be enrolled in Medicare or covered by any non-HDHP insurance, such as a spouse’s plan. The annual contribution limits for 2024 are $4,150 for individuals with self-only coverage and $8,300 for those with family coverage. If you are 55 or older, you can contribute an additional $1,000 annually. Contributions can be made by individuals or by employers on behalf of their employees.

Cost-Saving Benefits of HSAs

HSAs offer two primary cost-saving benefits:

1. Lower Insurance Premiums: HDHP premiums are typically lower than those of other health plans.
2. Tax-Free Payments: You can pay for qualified medical expenses with pretax dollars.

Additionally, any funds remaining in an HSA can be carried over year to year and invested, growing on a tax-deferred basis indefinitely. This is a significant advantage over health care Flexible Spending Accounts (FSAs), which often have a “use-it-or-lose-it” policy, though some employers allow a carryover of up to $500 per year.

When you turn 65, you can withdraw HSA funds penalty-free for any purpose, though non-medical withdrawals are taxable.

Estate Planning Benefits

HSAs also offer unique estate planning benefits. Unlike traditional IRAs and 401(k) plans, HSAs do not require minimum distributions once you reach age 73. The account balance can continue to grow tax-deferred, providing additional assets for your heirs.

Beneficiary Considerations:

• Spouse as Beneficiary: If your spouse is the beneficiary, the HSA is treated as their own, allowing for continued tax-free growth and withdrawals for qualified medical expenses.
• Non-Spouse Beneficiary: If someone other than your spouse is the beneficiary, the HSA terminates, and the beneficiary is taxed on the account’s fair market value. However, they can use HSA funds to pay for any qualified medical expenses incurred before your death within one year after your death, avoiding taxes on those amounts.

Maximizing Your HSA Benefits

HSAs are versatile tools that can help you manage health care costs, save on taxes, and plan for the future. Whether you are looking to enhance your retirement savings or plan your estate, understanding how to maximize your HSA benefits is crucial.

For personalized advice and more information on HSAs, contact us. We can help you navigate the specifics of HSAs and ensure you are making the most of this valuable financial tool.