Hsa Savings Account Tax Benefits

Who Qualifies For An Hsa

You must meet the following criteria to qualify for an HSA account:

• You are covered by a high-deductible health plan on the first day of the month
• You have no other health coverage except workers compensation, insurance for a specific disease or illness, a fixed amount of coverage per day for hospitalization
• You are not enrolled in Medicare
• You cant be claimed as a dependent on someone elses tax return

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Tax And Investment Benefits

Health savings accounts also offer special tax and investing advantages for employees. The primary benefit is lowering your tax obligation with contributions. If you contribute $2,000 per year, your tax obligation will be $2,000 lower than your taxable income. If youre saving through your employer, contributions will be considered pre-tax, and if you open up an account yourself, deposits are tax-deductible. There are no penalties for using these funds on eligible medical purchases, and no taxes or interest will be owed as your savings grow.

Many HSAs allow your savings to be put to work through investments after reaching certain balance thresholds. In these instances, your health savings can be used to invest in mutual funds, ETFs, and even specific stocks. As long as any profits from these investments are spent on qualified medical expenses, youll never have to pay capital gains taxes or any other additional income tax. Using an HSA in conjunction with other investment vehicles is a great way to boost your after-tax retirement income. Instead of viewing these funds strictly through a short-term lens, you can save thousands on taxes and secure your retirement with a smart health savings plan.

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Who Can Use The Hsa Money

The money in your account can be used for qualified health-care costs for yourself, of course, but also for any tax dependent.

“It doesn’t have to be someone who’s on your high-deductible health plan,” Durso said. “For example, your spouse may have coverage through their own employer, but you can still use the funds for their expenses.”

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Health Reimbursement Arrangement Flexible Spending Account And Dependent Care Fsa Tax Benefits

For HRAs, only the employer can contribute to the account. Those contributions are not added to the employee’s gross income and employees are not taxed on their HRA reimbursements.

For FSAs, contributions can be made by both the employee and the employer. Employee contributions are made with money taken from their paychecks pre-tax. The more out-of-pocket medical expenses an employee has in a year, the higher their annual election should be . The more the employee sets aside, the greater the tax savings would be. Distributions from an FSA are typically tax-free when used for qualifying medical expenses.

How Do I Get Reimbursed From An Hsa Account

The short answer is, send in a receipt to your HSA provider and you’ll get reimbursed for the expense.

There are many companies offering HSA accounts, and their procedures vary. The best HSA providers make it easy for you to open an account, pay money into it, keep on top of your available balance, and get money out of it.

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Consider A Framework For Account Drawdowns

Note: Withdrawal-order preferences may vary based on personal situations and goals.

Drawing down accounts in retirement should be an orderly process. In generating income, first rely on distributions that cannot be avoided like required minimum distributions from traditional 401 or IRA accounts. Additionally, annual dividends and capital gain distributions from active holdings in taxable accounts cannot be avoided and are a solid second source of income. Additional withdrawals from taxable accounts and non-RMD withdrawals from tax-advantaged accounts should generally come last since these are the most burdensome for taxation. For additional income, it is best to consider the client’s current and future tax situation to determine whether it makes the most sense to take additional distributions from tax-deferred accounts, triggering ordinary income, or sell taxable securities, triggering capital gains.

Taxes are complicated, and it’s easy for clients to make mistakes without guidance. When compounding capital for retirement, a tax-planning error could be costly. Have a plan for clients to maximize the benefits of tax-advantaged accounts to secure a better financial future.

Let Your Client’s Needs Guide Your Recommendations

While there’s no single order of priority for these accounts that works for everyone, a client’s individual circumstances can help guide you. Here are some general guidelines to consider:

• During accumulation, tax deferral is equally effective across account types, however, not everyone qualifies for all account types.
• Know the rules around availability, qualification, tax-treatment, and transfer options at death.
• Consider short- and long-term liquidity needs of your client.
• Long term: Employer sponsored plans, other tax-deferred accounts
• Short term: Taxable accounts and Roth IRAs offer more liquidity.

Advising clients on which tax-deferred and tax-free accounts to use, and when, is an important way that advisors can create value for their clients. Equally important is knowing how to allocate your client’s money across these account types to meet both short-term and long-term financial goals.

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High Deductible Plans Health Savings Accounts And Fsas

The rising inflation rate has also meant significant increases to contribution plans such as Health Savings Accounts.

HSA contributions for self-only coverage are up $200 and top out at $3,850, while family coverage is changing from $7,300 to $7,750. This is roughly a 5.5% increase from 2022-2023, up from the 1.4% increase seen from 2021-2022.

For High Deductible HealthPlans , minimum deductibles and maximum out-of-pocket numbers skyrocketed. Minimum deductibles now sit at $1,500 for self-only coverage and $3,000 for family coverage . Out-of-pocket maximums have landed at $7,500 for self-only, a $450 increase from 2022, while family coverage is set at $15,000, up $900.

Finally, Flexible Spending Accounts saw a $200 increase in maximum salary deferral to top out at $3,050, while the maximum rollover amount is up just $40 to $610.

Dependent Care FSAs saw no change and stayed at 2022s maximum salary deferral for single taxpayers and married couples filing jointly or separately. The maximum remains at $5,000 and $2,500, respectively.

Tax Reasons To Contribute To A Health Savings Account

A health savings account is a way to set aside some money, tax-free, to use for possible medical situations you cant see coming. If you dont end up needing the money, can also be used as a vehicle for saving for retirement. Using an HSA is also a way to lower your tax burden each year, and their are a variety ways this can happen. If you want help with medical planning or any other financial considerations, consider working with a financial advisor.

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Hsa Triple Tax Advantage

Now that you know a bit about the basics of an HSA lets dive into the unique advantages. Heres a closer look at the HSA triple tax advantage.

Tax-free contributions. The first tax advantage youll encounter through your HSA is that your contributions can be made tax-free. You might already be familiar with this type of tax advantage if you contribute to a 401 or traditional IRA.

Essentially, the funds you contribute to an HSA will be deducted from your taxable income for the year.

For example, lets say that you earned $50,000 in 2022. But you contribute $3,500 to your HSA. With that, your taxable income for the year would be lowered to $46,500.

A lower taxable income means a lower tax liability. So, tucking funds away into this account means your tax burden will be lower.

Tax-free growth. Next up, the funds you tuck into your HSA will be allowed to grow tax-free. Any investment growth or accumulated interest on your balance will be tax-free.

Depending on your investment strategy and your contributions, this tax-free growth could dramatically impact the balance of your HSA. Plus, there are no required minimum distributions each year.

With that, you can grow your HSA account every year. Of course, if you run into a medical issue, the account balance will take a hit. But thats what its there for! An HSA should be there to tap into when you have healthcare-related expenses to cover.

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Strategies To Maximize An Hsa

Americans with access to an HSA have a few strategies to make their money go further.

The best way to get the most out of an HSA is to contribute the annual maximum. In 2021, individuals can contribute $3,600 to an HSA, or $7,200 for family coverage. Account holders age 55 and older can make an extra $1,000 in contributions.

Some employers will match employee contributions, but the combination of employee-employer contributions cant exceed the IRSs limit. Independent contractors and self-employed individuals can open an HSA too and receive similar tax benefits from the contributions if they have a high-deductible health plan.

Also, consider consolidating more than one HSA. This is a possible scenario if a taxpayer changed jobs and opened two different HSAs under two different high-deductible health plans. This would increase the account balance and open up the opportunity to invest.

Another option to reach that threshold is to transfer money held in an IRA or Roth IRA to an HSA. The money would grow tax-deferred and depositing a lump sum may allow more account holders to access a required minimum balance to invest.

Finally, invest! If the benefits plan allows it, its the best way to grow the account. Some plan administrators require a minimum HSA balance before the account holder can consider investing. Find out what this number is, and work towards it over time.

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What Is A Health Savings Account

An HSA is a tax-exempt account used to pay or reimburse qualified medical expenses that generally would be eligible for the medical and dental expenses deduction. The amounts contributed to an HSA gain interest tax-free, and the account stays with you even if you change employers or leave the workforce. Unused funds carry over to the next year and there is no time limit on when the funds must be used, unlike a Flexible Spending Account in which funds are forfeited at the end of the year.

An HSA is set up by a qualified entity such as a bank, insurance company, or anyone approved by the IRS to be a trustee of Individual Retirement Arrangements . HSAs can only be established for individuals who qualify. There is no such thing as a joint HSA for married couples instead each person must qualify for, and have, their own account.

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Withdrawing From Your Hsa

Withdrawals from an HSA are tax-free as long you use the money to pay for qualified medical expenses.

“Qualified” expenses are detailed in IRS Publication 502, Medical and Dental Expenses. They include most medical costs, from birth control pills to guide dogs to surgery.

They also include mileage traveling to and from treatment, but not costs associated with items that are just considered “healthy,” like vitamins or gym memberships. Qualified expenses include costs incurred on behalf of yourself, as well as your spouse and any dependents.

An Extra Retirement Account

If youre already maxing out your 401 contributions, your HSA can serve as another place for you to save for retirement. HSA funds remain in your account from year-to-year if they arent spent, and you even retain ownership of the account if you leave your job or switch health plans. That means any investment earnings in your HSA have the potential to grow for decades, effectively creating an extra tax-advantaged retirement fundin addition to your 401 and any IRAsthat you can earmark for health-care expenses later in life. Keep in mind, though, that if you switch from a high deductible health plan to another type of health plan, you will not be able to contribute further to an HSA until you are once again covered by a high deductible health plan. You can still use it to pay for qualified expenses.

For the 2022 tax year, you have until Tax Day 2023 to contribute to an HSA accountup to $3,650 for individuals and $7,300 for families, while individuals age 55 or older can save an additional $1,000 per year in catch-up contributions to an HSA.2 And for the 2023 tax year, youll be able to contribute more to your HSAup to $3,850 for individuals and $7,750 for families, plus another $1,000 in catch-up contributions for individuals age 55 and over.3

You may also get some help from your employer. In 2021, employers contributing to employee HSA accounts gave, on average, $870.4

Please note Morgan Stanley does not seed HSAs.

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What Sort Of Medical Expenses Can I Use My Hsa For

You can use an HSA for qualifying medical expenses, and most HSAs provide a debit card for easy use. Some HSAs provide paper checks and online bill paying, too.

As long as your insurance doesnt cover them OR reimburse you, qualifying expenses are the same as those qualifying for the medical expense deduction, like:

• Professional services, medical treatments, and laboratory tests
• Dental services
• Hospital services
• Over-the-Counter Medications Because of the CARES Act, you can now use HSA funds to pay for OTC meds like painkillers, fever reducers, and more.

Keep receipts for any expense you use your HSA for, including doctor co-pays, prescriptions, and medical supplies. Also, keep all HSA statements. You dont need to submit any of the receipts when you e-file your return, but its a good idea to keep the receipts in case the IRS questions an expense.

Note: If you pay for a qualifying medical expense from an HSA, you cant also claim the expense as a medical deduction on your return.

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Can I Use My Hsa In Retirement

Yes. Starting an account now while youâre in good health, could help you in retirement â when your medical bills are likely to increase. For individuals who are Medicare-eligible , your HSA can be used to pay for premiums for Medicare with tax-free withdrawals, as with other qualified medical expenses although withdrawals to pay for Medicare supplemental policies are generally not tax-free. You can even pay for non-qualified expenses, but you will need to pay regular income taxes on those withdrawals. In addition, notes Goldsmith, âYou can also use an HSA to pay with pretax dollars for your qualified long-term care insurance premiums.â

Tax Treatment For Hsa Contributions

Contributions to an HSA are tax-deductible on your Form 1040 tax return as an adjustment to income. However, you don’t have to take them as an itemized deduction for medical expenses, which is advantageous because itemized medical deductions are limited to expenses paid in excess of 7.5% of your adjusted gross income in the tax year 2022.

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The 3 Tax Advantages Of Hsas

Health savings accounts are one of the most tax-advantaged< /span> 1 accounts that the IRS recognizes. Other retirement accounts are taxed at some point – whether that’s when the funds go into the account or when the funds are taken out – but HSAs have triple-tax advantages that other programs just don’t have.

Providing your employees with an HSA can help them not only pay for certain medical expenses, but it can also help them realize significant tax savings and save for the future. Here’s how it works:

Withdraw Without Tax Consequences

You can withdraw funds at any time to pay eligible medical expenses without having to pay tax on your withdrawal. So not only do you not have to wait a specific period to withdraw, but you will not pay a dime of tax on the money you’re using to pay your medical expenses.

Now that you know how well an HSA can benefit you, how can you estimate how much money you will save?

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Hsa Earnings Grow Tax

When you sign up for a health savings account, one of the most important things youll have to think about is how youre going to invest the money youve saved. Depending on who youve got your health insurance with, you may have a wide range of options to choose from. Picking the right mix of investments is key to maximizing your earnings.

One of the great things about an HSA is that no matter how much your account increases in value over time, your earnings normally arent subject to tax. Since youre not required to tap your HSA until you actually need it, you can sit back and watch your money grow without having to worry about a tax penalty.