How to Make the Most of Your Health Savings Account

Welcome to We're Talking Money. I'm Dustin Hocken, wealth advisor here at OmniStar Financial Group. Today we're going to be talking about one of the most underutilized tools in the financial planning toolbox. This account gives you a tax deduction today and is potentially distributed tax-free in retirement. We're talking about the health savings account, or HSA. Stay tuned to see if this account is right for you and it could be a good fit for your financial plan.

So an HSA, what is it? The HSA, or health savings account, is an investment account designed for medical expenses. Money that goes in this account gives you a tax deduction today, while the distributions, if used for qualified medical expenses, come out tax-free. It's extremely powerful. It's extremely rare. Most accounts will either give you a deduction today or they'll give you tax-free distribution in the future. They won't give you both, like a 401k, IRA, Roth IRA. Well, the HSA does give you both.

So now that we know about HSA, who can contribute? Well, an HSA works in conjunction with the high deductible health plan. So if you don't have a high deductible health plan, then you can't do the HSA and you're ineligible. Now, if you do have the option for the high deductible health plan, it might make sense to make this switch, but it's going to depend on other factors: health, age, family size, current medical issues, etc. So please consult a professional before making any changes.

So how much can you contribute? So just like any tax-favored account, there's always going to be a limit, and in 2022 limit for HSA for an individual was 3650 and it was 7 300 for the family plan. Now, those limits are going up. In 2023 the HSA jumps to 3850 for an individual and 7750 for the family plan. Additionally, if you're over 55, you contribute an extra thousand dollars. Now, if it's a husband and a spouse over 55 and they have one HSA under the family plan, they can contribute a thousand dollars. But if it's a husband and wife over age 55 and they each have their own HSA, they each can put a thousand dollars into those plans.

Another option to contribute is the qualified HSA funding distribution, or QHFD. So this little-known strategy can be a great way to get money into your HSA if for some reason one year you have a tough time and you just can't make the contributions. This allows you to transfer money from an IRA directly into an HSA with no taxes and no 10 early distribution penalty. Now, you can't contribute more than the annual limit, and it can only be done once in your, but it could be a great option if you're trying to consistently fund your HSA.

So what do you need to know? Being able to earn compounding interest on an account that is going to be distributed tax-free for your future medical expenses, incredibly powerful long term. Be careful. I suggest making sure you have at least one to two years of your health insurance deductible sitting in cash in the account at all times. Now, above that, let's go ahead and get the money invested. But we want to make sure we have that cash, one, because again we're using the high deductible health plan, so we're going to have a higher deductible than normal, and two, just in case anything crazy happens or very, very large medical emergency, we've got cash ready for it.

HSA can be used to pay Medicare premiums, long-term care premiums and other medical expenses. Again, money that's used for medical expenses is always, it should be a tax-free. After age 65, you can pull the money out for anything you want. Doesn't have to be medical related, and you won't have to pay that 20 penalty. So it essentially just turns into an IRA after age 65.

So what are the top takeaways? According to different studies, retirees, you're going to spend somewhere between 200 to 300 000 during their retirement on medical expenses. With the HSA, being able to invest that money while you're working and use that to pay that 200 300 000, that's extremely powerful. The other powerful thing too is even if we some reason don't have those medical costs, well, no big deal, now would just turned into an IRA at age 65. This is one of those accounts that is a win-win and most likely is a good option if you have the high deductible health plan.

I hope that's helpful. Appreciate everyone who tuned in. Be sure to like, share, subscribe. We certainly appreciate all the support. If you have questions about whether an HSA is a good fit for you, please reach out. We'd be happy to have that conversation. Until next time, we'll talk to you soon.