HSAs: The Gift of Health Savings
2022 has been a year of massive inflation and economic uncertainty. Yet amidst all this, national HSA contributions increased compared to last year. Not only that, but 48% of millennials and Gen Z’ers are now using HSAs to invest for retirement. The popularity of HSAs is only increasing in the face of financial stress. An HSA’s triple-tax advantage, investment eligibility, and capability to roll over annually provide the safety net we all need during these trying times.
The Triple-Tax Advantage
Your HSA contributions come straight out of your paycheck pre-tax, similarly to a 401(k). Your employer can also make pre-tax contributions to your HSA.
The growth of your HSA funds is not taxed. This makes investing these funds extremely valuable. Learn all about HSA investments here.
Tax-Free Withdrawals for Qualified Medical Expenses
You can withdraw from your HSA for qualified medical expenses at any age. Qualified medical expenses include doctor’s appointments, medical procedures, medication, dental and optical care, Band-aids, vitamins, and more. Try entering “HSA qualified items” into your Amazon search box to get an idea of just how much HSAs can cover!
After the age of 65, HSA funds can even be used for non-medical expenses. Any non-medical purchases will simply be subject to regular taxation.
Fight Skyrocketing Healthcare Costs by Skyrocketing Your Healthcare Savings
Maximizing Your HSA
The maximum annual HSA contributions for 2022 are $3,650 for individuals and $7,300 for families. The annual HSA contribution limits for 2023 will be $3,850 for individuals and $7,750 for families. Be sure to contribute these maximum amounts to your HSA each year, or as close to them as you can. Even if you can’t afford the maximums, it’s important that you contribute every year.
If you’re married, split your HSA into two accounts. You’ll still be limited to the maximum annual family contribution, but each spouse can make an annual $1,000 catch-up contribution once they reach age 55. If you haven’t started maximizing your HSA, it’s not too late. You can start contributing at age 50 and still build quite a nest egg because those are your peak earning years. (Be aware that enrolling in Medicare makes it so that you can’t contribute to your HSA anymore.)
What About Dependents?
Did you know that an individual does not need to be on their own healthcare plan to contribute to an HSA? Multiple family members who are all covered by someone else’s plan can contribute the maximum amounts allowed by the family HDHP to their own HSA accounts.
Because the annual contribution maximum is based on the type of plan and not individual status, single non-dependent children are able to fund their own HSAs with the full family maximum contribution limit.
This gets a little confusing: Spouses must share the yearly family maximum between each of their HSA accounts. On the other hand, children who can’t be claimed as a dependent on their parents’ tax return but are still covered by their parents’ HDHP can fully fund their own HSA with the family maximum.
Below is an example from The Kitces Report to help clear things up:
Steve and Susan are a married couple and have 2 adult children: Chelsea (age 22) works full-time and is not eligible to be claimed as a dependent, and Chad (age 20) is an undergrad student and is a dependent on his parents’ tax return. Steve and Susan have a family HDHP that satisfies the HSA requirements, and both children are covered by their plan.
Steve and Susan can contribute a combined total of $7,300 to their HSA accounts in 2022 (the $7,300 can be split between their 2 accounts any way they choose).
Because Chelsea is not able to be claimed as a dependent by her parents, she can contribute $7,300 (the family HDHP maximum) to her own HSA and deduct the contribution on her own tax return (regardless of whether her parents contributed to their own HSAs or not). Alternatively, Steve and Susan can contribute to Chelsea’s HSA (in addition to their own HSAs) as long as the total contributions made to Chelsea’s account (regardless of who makes them) do not exceed her own $7,300 (in 2022) family maximum limitation. And regardless of whether the contributions are funded by Chelsea or her parents, Chelsea would still be able to deduct all contributions made (by herself and her parents) to her own HSA on her own tax return. Even though Chad is covered by his parents’ HDHP, he is also claimed as their dependent, so he is not eligible to contribute to an HSA of his own.
The King of Retirement Vehicles
HSAs are the only retirement vehicle with a triple tax advantage that roll over from year to year. 401(k)s allow tax-free contributions and growth, but not withdrawals. Roth IRAs allow tax-free growth and withdrawals, but not tax-free contributions. And while FSAs do offer a triple-tax advantage, their funds do not roll over annually. HSAs take the crown!