Budgeting and Saving

The Underutilized Benefits of a Health Savings Account

Healthcare can be one of the priciest yet most essential parts of life’s journey. Unfortunately, many struggle to utilize the financial tools that may help. Take Health Saving Accounts (HSAs), for example.

In 2019, 55% of those with HSAs that did not record a distribution also did not receive either employee or employer contributions. This suggests that the lack of distributions are due to account holders becoming disengaged from their accounts, rather than not having access to this cost-saving financial tool.

For those looking to help manage the financial impact of healthcare, a Health Savings Account (HSA) may be just the ticket.

HSA Tax Benefits

A large draw for many are the tax benefits inherent to HSAs:

  • Contributions through an employer are always pretax
  • You can invest the funds after your account balance reaches a certain level
  • Distributions for qualified health expenses aren’t taxable

Additionally, unlike a Flexible Spending Account (FSA), which is funded with pretax dollars but must be used by a specific deadline, HSA contributions can remain in your account to be used for future medical bills at any time. In short, this means there is no “use it or lose it” penalty.

Keep in mind that if you spend your HSA funds for non-qualified expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for non-qualified expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

HSA Contribution Limits for 2022

HSA contribution limits are adjusted annually for inflation. For 2022, the self-only contribution limit is $3,650 or $7,300 for families. This is a $50 increase for individuals and a $100 increase for families from 2021. The contribution limit refers to contributions from both employers and employees (or family members).

These adjustments are rounded to the nearest $50 to account for inflation rates, which are determined using the Consumer Price Index for All Urban Consumers.

How to use your HSA

The IRS or your HSA provider are great sources when getting started. For example, the IRS recently issued a reminder that at-home covid tests, face masks, and sanitizing wipes can all be purchased, or qualify for reimbursement, through an HSA. In addition, the IRS offers an interactive assessment tool that can take the guesswork out of what qualifies as an HSA-friendly expense.

Sources:

EBRI.org, January 21, 2021; Marketwatch.com, March 17, 2021; IRS.gov, May 2021; IRS.gov, September 10, 2021


Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Allos Investment Advisors®, LLC.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.

Published for the blog on December 6, 2021 by Allos Investment Advisors®, LLC.

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