Health Savings Accounts: Connecting Health and Wealth

By Emily Kampeter – Vice President & Wealth Management Advisor

Good health is vital to living a happy and successful life. Even more reason to save for it like you’ve done for a new home, car, or child’s education. A Health Savings Account (HSA) can help you earmark funds for future healthcare expenses. The account has no required minimum distributions and provides a triple-tax advantage like no other retirement option.

Advantages to having a Health Savings Account:

1. Contributions are 100 percent tax deductible or pre-tax through payroll deductions
2. Funds grow tax-deferred, including earnings and interest
3. Withdraws are tax-free if used for qualified medical expenses

You can open an HSA if you’re enrolled in an HSA-eligible plan at work or through the private marketplace. When you’re no longer covered by an HSA-eligible plan (e.g. you’re enrolled in Medicare) you can’t make contributions, but previous contributions can continue to grow. You can even take your HSA with you should you switch employers or retire.

For 2022, the IRS contributions limits for HSAs are $3,650 for self-only coverage and $7,300 for family coverage. The 2023 IRS contribution limits for HSAs are $3,850 for self-only coverage and $7,750 for family coverage. If you’re over age 55, you can make a catch-up contribution of up to $1,000 annually. If you really want the most tax-efficient option available, consider contributing the maximum amount each year and not using personal funds to pay for current healthcare expenses. This allows your HSA funds to compound for long-term growth that you’ll likely need in the future.

According to Fidelity, an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover healthcare expenses in retirement. This estimate includes out-of-pocket costs associated with Medicare but does not include expenses related to over-the-counter medications, most dental services, and long-term care.

Once you have your healthcare nest egg and you’re ready to retire, you have several options when spending HSA funds. Prior to age 65, you can use HSA funds to pay premiums for an employer-sponsored plan under COBRA or while receiving unemployment compensation. You can also use your HSA to pay for tax-qualified long-term care insurance.

After age 65, you can use funds to pay for Medicare deductibles and copayments, including Part B and D premiums, just not Medicare supplement (Medigap) premiums. You can also purchase non-qualified medical expenses (e.g. dream car) without penalty, but you will pay state and federal taxes on those distributions.

When thinking about estate planning, be sure to designate an HSA beneficiary.

If your spouse is your beneficiary, it will be treated as your spouse’s HSA after your death. Non-spouse beneficiaries receive the fair market value of the HSA and funds are taxable to them in the year in which you die. You can make your estate the beneficiary, but you’ll want to work with tax and estate planning professionals to determine if it is the best option for you.