How to Leverage Health Savings Accounts to Your Benefit

Health Savings Accounts (HSAs) are powerful tools for helping you manage your  healthcare expenses. As a high-income earner, you are likely looking for ways to reduce  your taxes. In this case, HSA accounts offer triple tax advantages: 

-Your contributions are tax-deductible 

-The money in the account grows tax-free 

-Withdrawals for qualified medical expenses are tax-free  

Understanding the nuances of HSA accounts, with the guidance of experienced  financial advisors at Brown|Miller Wealth Management in Washington, DC, can make a  significant difference in your overall wealth accumulation and preservation strategies.  


The Basics: What is a Health Savings Account? 

An HSA is not just any savings account. It’s a user-driven way to handle medical  expenses and reduce taxable income. To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP).  

For 2024, the IRS defines a High Deductible Health Plan (HDHP) as one with a  minimum deductible of $1,600 for self-only coverage and $3,200 for family coverage.  These plans also have an out-of-pocket maximum, which includes deductibles, co payments, and other expenses but not premiums. For 2024, the maximum out-of-pocket  expenses are $8,050 for self-only coverage and $16,100 for family coverage. 

HDHPs are designed to encourage more cost-conscious decisions since you’re paying  more upfront before the insurance coverage kicks in. They also allow you to contribute  to a Health Savings Account (HSA), which offers tax advantages for medical expenses. 


Understanding Contribution Limits  

For 2024, the contribution limits for Health Savings Accounts (HSAs) have increased to  account for inflation. Individuals with self-only coverage under a high-deductible health  plan (HDHP) can contribute up to $4,150, a significant increase from the previous year.  Those with family coverage can contribute up to $8,300.  

These adjustments allow individuals and families to set aside more pre-tax dollars,  reducing their taxable income while providing a financial resource for future medical  expenses. 

Additionally, individuals aged 55 and older can continue to make a catch-up contribution  of an additional $1,000 per year, which remains unchanged. This benefit helps those  approaching retirement bolster their savings for future healthcare costs. 


The Tax Benefits of HSAs  

Health Savings Accounts (HSAs) offer several tax benefits that can be advantageous in  different financial scenarios. For example, each benefit provides a unique advantage  whether you want to reduce your current tax liability, save for future medical expenses,  or even prepare for additional medical costs during your retirement years. 

  1. Pre-Tax Contributions: Money contributed to an HSA is not subject to federal  income tax at the time of deposit. If you contribute $3,000 to your HSA, that  amount is deducted from your taxable income, potentially lowering your tax bill  for the year.
  2. Tax-Free Growth: The funds in your HSA grow tax-free. This benefit is similar to  what you see in a Roth IRA, where interest, dividends, and capital gains  accumulate without tax liabilities. For example, if your HSA investments earned  $1,000 annually, you don’t have to pay taxes on that growth. 
  3. Tax-Free Withdrawals for Qualified Medical Expenses: Withdrawals from an HSA  for qualified medical expenses are not taxed. This can include several costs,  from doctor’s visits and surgeries to prescriptions and dental care. For instance, if  you have a $5,000 surgery and use HSA funds, you pay no taxes on this  withdrawal. 
  4. Additional Retirement Savings Vehicle: After age 65, you can withdraw funds  from your HSA for non-medical expenses without the 20% penalty, although  these withdrawals will be taxed as income, just like a traditional IRA. This can be  seen as an additional retirement savings tool, where funds can be used for any  type of expense, not limited to medical. 

Each of these benefits provides a unique advantage, whether your goal is reducing your  current tax liability, saving for future medical expenses, or even preparing for  unexpected expenses during retirement. 


HSA Penalties 

Health Savings Accounts (HSAs) have specific rules that can lead to penalties if they  are not followed. The following are the main penalties associated with HSAs: 

  1. If you use HSA funds for non-medical expenses before age 65, the amount  withdrawn is subject to income tax and a 20% penalty. After age 65, the penalty  is waived, but you’ll still owe income tax if the money is used for non-medical  expenses. 
  2. Contributing more than the annual limit can result in a 6% excise tax on the  excess amount. This penalty continues each year until the excess contribution is  corrected, either by withdrawing the excess funds or reducing future  contributions. 
  3. Keeping receipts and records of medical expenses paid with HSA funds is  crucial. Failure to do so can make it difficult to prove that withdrawals were used 

for qualified medical expenses, potentially leading to additional taxes and  penalties. 

  1. Contributions to an HSA must stop once you are enrolled in Medicare. Any  contributions made after Medicare enrollment may be subject to penalties. 


Other Ways to Leverage an HSA Account 

Even with their triple tax benefits, Health Savings Accounts (HSAs) are often overlooked  as investment tools. Many people just use HSAs like debit accounts to cover their yearly  medical bills and miss out on the investment perks. 

Here are some additional ways you can leverage an HSA account: 

  1. Most HSA deposits sit in low-interest bank accounts. However, many HSAs now  offer the option to invest in longer-term choices like stock and bond mutual funds  and index funds, allowing you to take advantage of tax-free growth.  
  2. Your withdrawals must be for medical expenses or reimbursements. These  reimbursements can be for any past year when you had a high-deductible health  plan.  
  3. To keep track of your HSA withdrawals, it’s important to save your out-of-pocket  medical expenses from your healthcare provider at the end of each year and  keep them with your tax records. Report these healthcare expenses on your tax  return. This can also help if you’re eligible for an itemized deduction for medical  expenses. 
  4. Contribute to your HSA each year, ideally investing in long-term options that will  grow over time. When you retire, you can make tax-free withdrawals to cover  decades of healthcare costs. Alternatively, use these tax-free withdrawals for  

various Medicare expenses, including premiums, deductibles, co-pays, and  coinsurance.


How Brown|Miller Wealth Management Can Assist with Your HSA Needs  

At Brown|Miller Wealth Management, our team of dedicated CFP® professionals in  Washington, DC, understands the complexities of HSA planning.  

Whether you’re just starting or planning to refine your strategy, our advisors can help  you: 

  • Evaluate whether an HSA is right for your financial and health situation.
  • Understand the contribution limits and tax benefits associated with HSAs.
  • Invest HSA funds wisely to maximize growth potential. 
  • Plan comprehensively, integrating HSAs into your broader tax planning and  retirement strategies. 

Ready to learn more about our comprehensive wealth management and HSA tax  planning strategies? Let’s connect.



Disclaimer: This article is intended for informational purposes only, and not to be a client specific suitability analysis or recommendation, an offer to participate in any investment, or a  recommendation to buy, hold or sell securities. Do not use this report as the sole basis for  investment decisions. Do not select an asset class or investment product based on performance  alone. Consider all relevant information, including your existing portfolio, investment objectives,  risk tolerance, liquidity needs, and investment time horizon. This report is for general  informational purposes only and is not intended to predict or guarantee the future performance  of any individual security, market sector, or the markets generally.  
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Author: Christopher W. Brown, CFP®, CIMA®

Christopher W. Brown is the Founder and Managing Principal at Brown | Miller Wealth Management.