Common HSA QuestionsSubmitted by Berk Cleveland Rathmell Wealth Strategies LLC. on February 18th, 2019
High Deductible Health Plans (HDHP) are becoming more common in the healthcare space these days. Because of this, we have been receiving a lot of questions from clients about how their Health Savings Accounts (HSA) fits into their financial plan. I wanted to go over some of the questions that have been coming up.
What is an HSA and how is it beneficial? In short, an HSA is a savings account that allows you to pay for qualified medical expenses with tax-free money. HSA accounts are available to those who are in a High Deductible Health Plan. The money that goes into an HSA is before-tax money. It can be invested to grow with the market and used for qualified medical expenses tax-free. This is called a triple tax advantage.
Can I save my receipts and pay myself back later? Yes, you can. There is no time limit on when you have to reimburse yourself for medical expenses. So in theory, you can pay out of pocket, save your receipts, and reimburse yourself down the road whenever you want or need the money. However, this requires that you keep diligent records and can prove that you did not reimburse yourself previously if you are audited.
What happens to my HSA when I retire/change companies? Your HSA is yours even if you retire or move jobs. Depending on the new healthcare plan you are under with a new employer will determine if you can keep contributing to your HSA, but the money is yours no matter what. Once you reach age 65, you can pull money out for whatever you choose. If you pull money out for a nonqualified expense, the money will only be taxed as regular income. However, if it is for a qualified expense, then it remains tax-free.
Can I pay my insurance premiums with it? You can’t pay for your healthcare insurance premiums. However, you can pay for long-term care insurance and Medicare premiums.
Can I pull the money for any other expenses? If you distribute funds from your HSA for a nonqualified expense, then you will be subject to income taxes plus a 20% penalty based on the amount pulled. If you pulled $5,000 from the HSA for the nonqualified expense, then you would be subject to income taxes on the $5,000 and $1,000 in penalties… Sheesh.
Will I have to take Required Minimum Distributions on my HSA? You do not have to take RMDs from an HSA. Unlike an IRA, you are not required to take money out of an HSA after your reach age 70 ½.
The HSA can be a great tool in your financial plan, but it is important that you don’t fund it for the sake of “getting away without paying taxes.” Some people get too caught up in trying to find ways that avoid taxes. If you can afford to max out your HSA, great; but if you don’t have an emergency fund or don’t have your retirement savings on track, then it’s important to look at those items before focusing on HSA contributions.