November 21, 2023 - 9:58 am
Dear Savvy Senior: I’m interested in contributing to a health savings account to help boost my retirement savings but would like to better understand how they work. What can you tell me? — Almost 60
Dear Almost 60: A health savings account, or HSA, is a fantastic financial tool that can help you build a tax-free stash of money for medical expenses now and after you retire. But to qualify, you must be enrolled in a high-deductible health insurance plan. Here’s an overview of how they work and how you can open one.
HSAs have become very popular over the past few years as the cost of health care continues to skyrocket, and because more and more Americans have high-deductible health plans.
The great benefit of a HSA is the triple tax advantage that it offers: Your HSA contributions can be deducted pretax from your paycheck, lowering your taxable income; the money in the account grows tax-free; and if you use the money for eligible medical expenses, withdrawals are tax-free.
And if you change jobs, the HSA moves with you.
To qualify, you must have a health insurance policy with a deductible of at least $1,500 for an individual or $3,000 for a family in 2023. In 2024, the deductible rises to $1,600/individual or $3,200/family.
This year, you can contribute up to $3,850 if you have single health insurance coverage, or up to $7,750 for family coverage. Next year you can contribute significantly more — up to $4,150 for single coverage or up to $8,300 for family coverage. And people 55 and older can put away an extra $1,000 each year. But you cannot make contributions after you sign up for Medicare.
The money can be used for out-of-pocket medical expenses, including deductibles, copayments, Medicare premiums, prescription drugs, vision and dental care and other expenses (see IRS.gov/pub/irs-pdf/p502.pdf, page 5, for a complete list) either now or when you retire for yourself and your spouse as well as your tax dependents.
Unlike a flexible spending account, an HSA doesn’t require you to use the money by the end of the year. Rather, HSA funds roll over year to year and continue to grow tax-free in your HSA account for later use.
In fact, you’ll get a bigger tax benefit if you use other cash for current medical expenses and keep the HSA money growing for the long term. Be sure to hold on to your receipts for medical expenses after you open your HSA, even if you pay those bills with cash, so you can claim the expenses later. There’s no time limit for withdrawing the money tax-free for eligible medical expenses.
But be aware that if you use your HSA funds for nonmedical expenses, you’ll be required to pay taxes on the withdrawal, plus a 20 percent penalty. The penalty is waived for those 65 and older, but you’ll still pay ordinary income tax on withdraws not used for eligible expenses.
How to open an HSA
You should first check with your employer to see if they offer an HSA, and if they will contribute to it. If not, you can open an HSA through many banks, brokerage firms and other financial institutions, as long as you have a qualified high-deductible health insurance policy.
If you plan to keep the money growing for the future, look for an HSA administrator that offers a portfolio of mutual funds for long-term investing and has low fees. Some of the top-rated HSA providers in 2023 are Lively, HealthEquity, OptumBank, Fidelity, HSA Bank and Bank of America.
After setting up your HSA plan, adding money is pretty straightforward. Most plans let you do online transfers from your bank, send checks directly, or set up a payroll deduction if offered by your employer.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org.