Healthcare is one of the essential parts of life's financial and personal journey. Many have not yet utilized all the financial tools that may help them.
Health Savings Accounts (HSAs)
An HSA gives you a tax-exempt savings account to pay for your healthcare expenses. The money you don't spend in one health plan year rolls over to the next. You are also enrolled in an HDHP (High Deductible Health Plan), in which your insurance company will only pick up the tab for significant healthcare expenses (including types of preventive care, maternity care, and pediatric primary care).
A large draw for many are the tax benefits inherent to HSAs:
- Contributions through an employer are always pre-tax.
- You can invest the funds after your account balance reaches a certain level.
- Distributions for qualified health expenses aren't taxable.
Unlike a Flexible Spending Account (FSA), which is funded with pre-tax 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.1
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 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 includes 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.2
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-19 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.3
In the traditional insurance plan, you pay high premiums up front; in the HDHP, you pay lower premiums and essentially assign the savings to your own healthcare expense account.
Flexible Spending Accounts (FSAs)
With an FSA, you deduct pre-tax dollars out of your salary to pay qualified medical expenses. You can designate an FSA for your healthcare expenses or those of a dependent. But most FSAs are "use it or lose it"—at the end of the plan year, the money left in the account doesn't roll over into the following year. Employees tend to minimally fund FSAs, although they can be used in conjunction with HSAs.
Consolidating Medical Procedures
If your medical expenses are more than 7.5% of your Adjusted Gross Income (AGI), you may be able to use them to cut your tax bill. This includes payments to doctors, dentists, surgeons, mental health practitioners and other medical bills. It can also extend to hospital care, nursing home care, additional programs, prescription drugs, insulin, and more. For some, this incentivizes consolidating eligible medical procedures within a single tax year rather than spreading them across multiple years when they might not meet the threshold.
If you're considering this option, you will want to keep good records because you need to itemize these through Schedule A on your tax return. Ultimately, it may be a good idea to schedule your treatments carefully, as you will only be able to claim costs accrued in the same year. There's no carry-over. If you can arrange them so that your charges amount to the necessary portion of your AGI, it can be to your advantage when tax time comes.4
Whether you consider taking on an HSA, FSA or consolidating your medical procedures, it may be helpful to reach out to a financial professional to talk about these options ahead of the new year. Our team of financial advisors at California Retirement Advisors will assist you in ensuring that you are secure and comfortable during your retirement. Feel free to contact us today at cradvisors.com.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.