You have likely heard of Health Savings Accounts (HSAs), and you may even understand the basics of how an HSA works. These accounts are really not too complicated. If you have a qualifying high deductible health plan, you may contribute to an HSA. Then, you can take tax-free distributions to pay for qualified medical expenses.
Beyond these basics, there are many advantages that an HSA can offer that many people are not aware of. Here is a list of the surprising benefits that you get with an HSA.
Qualified medical expenses include more than just doctor bills. Qualified medical expenses include those that would generally qualify for the medical expense deduction under the Tax Code. This means you can take a tax-free distribution from your HSA to pay not only medical expenses like doctor and hospital bills, but also medical supplies, prescription copayments, dental care, vision services, and even chiropractic expenses.
Your family can benefit too. You can take tax-free distributions from your HSA to pay for your spouse or child’s medical expenses, even if they are not covered by your high deductible health insurance plan.
Reimburse yourself years later. You can take a tax and penalty-free distribution from your HSA in 2023 to pay for medical expenses in a previous year, as long as the expenses were incurred after you established your HSA. That means you do not have to make an HSA withdrawal every time you have a medical expense. You can pay that expense out of your pocket and let your account grow, or decide to reimburse yourself in a later tax year.
HSAs can help even after contributions have stopped. Even if you no longer have a high deductible health plan and you are no longer contributing to your HSA, you can keep the HSA and continue to take tax-free distributions from it to pay for your qualified medical expenses for you, your spouse, and your dependents. However, you cannot contribute to an HSA once you are enrolled in Medicare. But you can keep your existing HSA and still take tax-free distributions for qualified medical expenses.
Gain new benefits in retirement. When you reach age 65, you also gain some new benefits with your HSA. Generally, insurance premiums are not considered qualified medical expenses. However, after age 65 and enrollment in Medicare, certain insurance premiums can be paid tax-free with HSA distributions. You can take tax-free distributions from your HSA to pay for Medicare premiums, excluding Medigap.
Benefits for your spouse. If your HSA beneficiary is your spouse, after your death, she can maintain the HSA in her own name and can continue to access the funds. Distributions for qualified medical expenses will be tax free just as they would have been to you.
By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.