A health savings account (HSA) is a medical savings account that can be used in conjunction with a high deductible health insurance plan. An HSA offers a number of advantages and can be a key tool not only in planning for health care costs, but as part of your overall financial planning.

What is a Health Savings Account (HSA)?

An HSA is a medical savings account that can only be used in conjunction with a high deductible health plan as defined by the IRS. Many employers who offer high deductible plans will also offer an HSA option to their employees. Those who are self-employed can also open an HSA as long as they have a high deductible health plan.

One thing that makes an HSA unique is the fact that money contributed to an HSA can be carried forward from year-to-year if it is not used to cover eligible healthcare costs in the current year. This differs from an FSA which is another popular type of medical savings account, where the money must be used in the current year or it will be lost to the account holder.

Tax Advantages of HSAs

HSAs offer a number of tax advantages.

• Contributions to an HSA are made on a pre-tax basis just like a traditional 401(k).
• Money grows tax-free inside of the HSA.
• Money can be withdrawn tax-free to cover the cost of eligible medical expenses.

Saving for Healthcare Expenses

An HSA can be an excellent way to save for health care costs in a tax-efficient way. A key benefit is the ability to carry over the balance in the HSA for use in future years. This can help in a year in which you might incur high medical costs and need a source of funds to cover portions subject to a deductible or not covered by your insurance plan.

This can include building a healthcare retirement nest egg. Many people use their HSA to cover out of pocket medical costs in retirement since there is no time limit on how long the HSA can be carried forward.

Investment Opportunities and Growth Potential

HSAs can be invested just like a 401(k) or IRA account. Your employer may offer a number of investment options for the HSA. The portability feature of HSAs that allow you to take this money with you when leaving an employer also allows you to move the investment account elsewhere if desired. There are a number of online brokers and others who offer HSA investment accounts.

Strategies for Maximizing HSAs

HSAs have annual contribution limits. For 2023 and 2024 these limits are:

• Individuals $3,850 for 2023 and $4,150 for 2024
• Family coverage $7,750 for 2023 and $8,300 for 2024
• Catch-up contributions of $1,000 for those who are 55 or over in both years

Additionally, some employers may make contributions on employee’s behalf as well.

Contributing the maximum amounts each year allows you to invest this money for future healthcare costs including in retirement. You will also receive the current year tax benefits for making the contribution as well. HSAs can be used as an additional source of retirement savings to cover eligible healthcare costs. Additionally, money in an HSA can be treated like an IRA at age 65, though withdrawals will be taxed just like a traditional IRA.

Potential Drawbacks and Considerations

While there are many advantages and positive features of HSAs, there are some drawbacks and things to consider as well.

One is the relatively low contribution limits. Another is that you must have a high deductible health plan in order to contribute. Depending upon the plan and your situation, this could result in substantial out-of-pocket annual medical costs for you in some years. This could even negate the benefits of the HSA.

Some HSA accounts may carry high fees with them. Additionally, it is important that receipts for any medical expenses for which HSA money is withdrawn have proper documentation including receipts and other paperwork.

Long-Term Financial Planning and HSA Integration

For those who are eligible, an HSA can play a key role in your long-term financial and retirement planning. For those who are able to contribute the maximum each year and who can leave all or most of this money invested over time, the HSA can play a key role in their retirement savings and investing strategy. Medical costs can be significant in retirement. Having an HSA can help mitigate these costs in a tax-free fashion.

Contact your Wedbush financial advisor to discuss how an HSA can play a key role in your overall financial plan.

Disclosure

Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.