The Health Savings Account is one of the most powerful pieces of a well-designed health care strategy. However, they continue to be one of the most underutilized tax and wealth building strategies in the tax code. It’s available to millions of Americans and they don’t even know it.
The HSA includes several significant benefits, all explained more fully below:
- Saving Taxes with a great ‘above the line tax deduction
- Creating a tax-free ‘bucket’ you can take with you anywhere you want (essentially a portable IRA)
- Building this ‘bucket’ with any type of investment. Not just WallStreet Products
- The potential to save on health insurance premiums
- Saving on health care costs by paying cash for services
- The ability to pull out cash tax-free at any age for a long list of medical expenses and services
- and taking CONTROL of your own health care strategy with a proactive approach
The bottom line is, the HSA helps Americans save on healthcare expenses, save taxes, and most importantly taking control of their own health care strategy.
The most important thing to remember when you start your study and understanding the power of the HSA, is that health insurance (and who your insurance company is, or who your plan is sponsored by), is completely different than where your Health Savings Account is located, sponsored by, or housed with. (More on this below).
The Tax Deduction
Your HSA contributions are deductible from your gross pay, or business income, on the front page of your tax return. No income limits! No phasing out! Married or Single! Kids or no Kids! Entrepreneur or W-2 Employee! This gives you a powerful tax deduction and can potentially even put you into a lower tax bracket.
In 2020, the tax deduction is:
- $3,550 for singles,
- $7,100 for head of household and married filers, and
- If you are age 55-65, you can contribute an extra $1,000, either as a single individual or a couple (so that’s $4,550 or $8,100).
These amounts are adjusted for inflation each year and every time you “pass go”, in January, you can make a new contribution. Meanwhile, your investments within the HSA continue to grow tax-free ON TOP of the annual contribution amount. (More on that ‘investment’ aspect below).
The ‘Health Insurance Issue’ is probably the biggest hurdle to starting and investing with an HSA. In order to qualify for an HSA, you need to have a ‘High Deductible Health Plan”, oftentimes referred to as an HDHP. Under the tax law, HDHPs must set a minimum deductible and a limit, or maximum, on out-of-pocket costs. Here are the numbers for 2020:
Remember, the insurance is completely separate. Get the right type of insurance that qualifies you and then DON’T CALL your insurance company for a Health Savings Account…they don’t administer the HSA- they just sell insurance.
But here is the ‘silver lining’…once you decide to go down this path to try and qualify for an HSA with a HDHP, there is a good chance you are going to see savings on health insurance premiums. Historically, when you have a higher deductible, you have a lower premium because you are coming out of your own pocket for dollars up front. This saves the insurance company money. The question is, will they pass this savings on to you? (good luck- right?)
A Word of Wisdom. Don’t be frustrated if you start shopping for an HDHP and your premiums stay level or actually increase. This may surprise you, when you were operating under the logic that: “A ‘higher deductible’ and saving the insurance company money should actually reduce my premium”. However, many of those working in the health insurance field will tell you what the problem is. in one word: Network. Sometimes when you get the higher deductible, but choose to have a more expensive network of doctors or specialists, you can actually see a premium increase rather than decrease. Here’s the wisdom: Health insurance premiums are driven more by ‘network’, rather than ‘deductible’.
So if you are willing to go with any network AND a higher deductible, you should see premium savings and the door to the HSA party open up to you!
You don’t pay taxes on the investments inside the HSA, just like a retirement account. You get to make a tax deductible contribution (see above) and THEN when you invest the funds you don’t pay taxes on the profits you make within the HSA.
More specifically, the funds grow “tax-free” just like a Roth IRA…not “tax deferred” like an 401k or IRA. When you pull money out of a Roth IRA, you don’t pay taxes. This is the same for an HSA. When you make withdrawals in the future for medical expenses, those withdrawals come out completely tax free…and remember investment returns are NOT counted towards your annual contribution either. So…if you win big on an investment inside your HSA, you still get to make another contribution when you ‘pass Go’ every January.
The HSA is ‘Portable’
What I mean by ‘portable’ is that the HSA is yours much like an IRA (Individual Retirement Account). It’s not a “use it or lose it” plan, and if you leave an employer sponsoring your HSA, you take the HSA with you no matter how long you worked there! You don’t even have to own a business OR have a job to open and start an HSA. Again, the only requirement is the HDHP insurance (discussed above).
There are three important deadlines you should be aware of. Again, opening the HSA is completely separate from making contributions, and then there is the process of paying for health care expenses or getting reimbursed.
- If you want the deduction in 2020, you have to enroll in a high-deductible health insurance plan (HDHP) before December 1st 2020,
- If you have the proper HDHP by December 1st, 2020, you have until April 15, 2021 to make your tax deductible contribution,
- Once you turn age 65 you can’t open an account, OR make any more contributions to your HSA. HOWEVER, you can keep investing the funds in your HSA (if you have one) and pulling out withdrawals for qualified medical expenses until the day you die. (See below on what happens if you die with money in your HSA).
How to set-up an HSA?
Once you have the proper HDHP insurance, you can oftentimes set up your HSA within minutes online. Moreover, you can open an account for an HSA wherever you choose. If you are going to simply want a debit card to pay expenses out of your HSA and make contributions in order to turn around and pay medical bills, a plan at HSA Bank- Debit Card may be a good choice. If you want to more actively invest your HSA in stock market products like stocks, ETFs and mutual funds (not planning to take out withdrawals all the time), you may want to consider a Fidelity-HSA Trading Account. However, if you want to open an account that allows you to buy real estate or invest in small business (again, letting the account grow rather than pulling out $$), then an HSA at Directed IRA- HSA would be an excellent fit (more on self-directing below).
Tax-Free Withdrawals for Qualified Expenses
You can also spend the money tax-free on a LONG LIST of qualified medical expenses. These expenses may include deductibles, dental, eye-care, chiropractic, acupuncture and even hotel and lodging while at the hospital. The list is quite exhaustive and comprehensive. In February of this year, the IRS updated Publication 502 (Check out for a list of the hundreds of medical expenses you can pull out of your HSA tax-free.)
Moreover, you can start taking out money immediately and there’s no waiting period. Just change the way you normally approach your health care spending. Essentially, you have two ways to approach “paying” for medical bills with an HSA.
- You can stop at the bank, or go on-line and make a deposit in your HSA before you go to the doctor. Then pay the bill out of your HSA Visa debit card. You just generated a write-off the same day!
- Or, you could keep track of all your qualifying medical expenses, and at the end of the year, or several times during the year, simply ‘reimburse yourself’ out the HSA account for the medical expenses you incurred.
Both methods of ‘reimbursement’ or ‘payment’ give you the write-off. However, some people choose to ‘let the money ride’ and invest the HSA while paying out of pocket in the short-term. Their goal is to build up the HSA over time and use the HSA account in the future when their medical bills may be more substantial.
Whichever method you choose to utilize, the keyword is ‘flexibility’. There are so many options to help you make the HSA work effectively and you shouldn’t have a problem creating a system that fits your needs, goals and desires.
Self-directing Your HSA Investments.
You can even “self-direct” your investments inside your HSA. This means you aren’t simply stuck with a mutual fund option provided by your bank. You could invest in a restaurant, real estate or even super bowl tickets. If you want to self-direct, just place your HSA funds with a ‘custodian’ that allows for self-directing rather than with your local bank. Read this related article on the topic regarding the self-directing strategy, by Best-Selling Author Mat Sorensen: Who are Self-Directed IRA Investors?
In fact, many of my clients are shocked to learn that I have owned a cash flowing rental property in my HSA for more than 8+ years. My HSA owns 100% of an LLC in Illinois, that owns the rental property. This little rental LLC actually paid for one of my kids braces tax-free!
An HSA can actually help pay for your retirement
After you turn 59 1/2, there is also the option to withdraw the money for non-health care expenses, and then pay federal income taxes on it. This means it is no longer a “tax free” account as I described above, but a “tax deferred” account – since you’ll be using the funds for non-health care reasons.
At this point, the HSA acts much like a traditional IRA since the HSA holder pays ordinary income taxes on non-medical related withdrawals, with the added perk that you don’t have the mandatory disbursements usually required by traditional IRAs. This protects you from the concern I often hear “What happens if I don’t need the money for health care”? The simple answer is, don’t worry- you can use it like an IRA in the future.
What happens if I die with money in my HSA?
It’s not as bad as you think. When you set up your HSA, you will be required to list a primary beneficiary and contingent beneficiary. If you are married and your spouse inherits your HSA, it simply drops into their HSA tax-free. If anyone other than your spouse inherits your HSA, it’s treated just like a regular IRA for inheritance purposes. Frankly, I make sure your Revocable Living Trust is your contingent beneficiary so there aren’t any questions or problems with multiple beneficiaries. See my article: “Do I need a Living Trust? – What You Need to Know”.
Bottom line, the HSA is one of the most underutilized tax strategies by Americans today. Even President Trump under the TCJA left it alone and in his Inaugural Address mentioned the HSA by name and stated it needs to be a larger part of any changes to the healthcare legislation. It’s a fantastic tax savings strategy as well as a powerful tool to help pay for current and future health care costs. Everyone should at least consider the HSA as an option when purchasing insurance and saving for taxes.
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.