One of our biggest expenses we incur which causes too much stress is medical. We go to the doctor and worry about the high cost, pay for prescriptions, and even buy sundries for medical situations for which we don’t often account. Ultimately, we chalk all of this up to a necessary evil. Yet, medical items and bills can actually be something we can use as a huge tax saving. How? It is an often misunderstood and little utilized account called an HSA which stands for a Health Savings Account.
An HSA is a tax advantaged account that less than ten percent of Americans own and/or invest in. Actually only 9.6% of Americans utilize HSAs, but they have more benefits and can even beat out a 401(k) and a Roth IRA.
The purpose of an HSA is to save money intended for medical expenses. HSAs are for those who have a High Deductible Health Plan known as an HDHP. These are plans in which you pay most of the expenses out of pocket. According to the tax law, these plans must establish a minimum deductible as well as a maximum or limit on the out-of-pocket expenses.
Using the information from Healthcare.gov, the 2023 minimum deductible for an individual is $1,500.00 and the maximum out-of-pocket costs is $7,500.00. That is the minimum and maximum an individual with an HDHP would pay for all health care items and services before the plan would begin to pay and the most a person would have to pay in the event that more health care items and services would be necessary. For families, the minimum is $3,000.00 and the maximum is $15,000.00
HSAs are not for everyone such as those who have an insurance plan, usually paid for by their employer, with a low deductible. But for all others who are looking for tax advantages and ways to save on health insurance premiums, an HSA can greatly benefit you.
A beauty of the HSA is that there is a triple tax advantage. This works because the money goes in tax-free as pretax income, this money grows tax free, and the money comes out tax free. HSAs are the only account that has pretax contributions AND tax free withdrawals, but you must have qualifying medical expenses. Following is a list of qualifying expenses as noted by Hsabank.com.
- Artificial limbs
- Artificial teeth*
- Birth control treatment
- Blood sugar test kits for diabetics
- Breast pumps and lactation supplies
- Contact lenses and solutions*
- COVID-19 diagnostic testing and treatment
- Dental treatments (including X-rays, cleanings, fillings, sealants, braces and tooth removals*)
- Doctor’s office visits and co-pays
- Drug prescriptions
- Eyeglasses (Rx and reading)*
- Fluoride treatments*
- Feminine hygiene products
- Fertility enhancement (including in-vitro fertilization)
- Flu shots
- Guide dogs
- Hearing aids and batteries
- Infertility treatment
- Inpatient treatment at a therapeutic center for alcoholism or drug addiction
- Laboratory fees
- Laser eye surgery*
- Medical alert bracelet
- Medical records charges
- Occlusal guards to prevent teeth grinding
- Orthotic Inserts (custom or off the shelf)
- Over-the-counter medicines and drugs (see more information below)
- Personal protective equipment (PPE) like masks and hand sanitizer
- Physical therapy
- Psychiatric care
- Special education expenses that include tutoring for a child with learning disabilities caused by mental impairments (recommended by doctor)
- Speech therapy
- Stop-smoking programs (including nicotine gum or patches, if prescribed)
- Surgery, excluding cosmetic surgery
- Vision exam*
- Walker, cane
For those who don’t have qualified medical expenses, there are still things that you can do pretax. There is also an age 65 rule. If you use the HSA other than for a qualified medical expense, you would pay the income tax minus a 20% penalty. But if you are 65, the HSA turns into a Traditional IRA. This means you can use the funds for anything if you pay income taxes. HSAs allow you to reimburse yourself for qualified medical expenses if you keep your receipts plus there is no deadline. The following is a step-by-step guide for how to navigate this.
- Pay for qualified medical expenses out of pocket.
- SAVE all of your receipts. I, personally, take a picture on my phone and categorize mine to help me keep them organized.
- Reimburse yourself later.
Following is a list obtained from Hsabank.com, though not comprehensive, of some of the common over-the-counter medicines that are HSA approved by the IRS:
- Acid controllers
- Acne medicine
- Aids for indigestion
- Allergy and sinus medicine
- Anti-diarrheal medicine
- Baby rash ointment
- Cold and flu medicine
- Eye drops*
- Feminine antifungal or anti-itch products
- Hemorrhoid treatment
- Laxatives or stool softeners
- Lice treatments
- Motion sickness medicines
- Nasal sprays or drops
- Ointments for cuts, burns or rashes
- Pain relievers, such as aspirin or ibuprofen
- Sleep aids
- Stomach remedies
Take note that there are limits and restrictions regarding HSA Contributions. The limit for 2023 for an individual is $3,850.00 and $7,750.00 for a family. Those 55 and above are allowed to contribute an additional $1,000.00. That amount is not huge, but the HSA makes up for it in big ways.
When investing in an HSA, you are investing in more than a savings account. Investing in an HSA also gives you the flexibility to also invest the funds inside of the account. This means that when you save with an HSA for 30 years, individually you would amass $695,300.00 and as a family, $1.4 million assuming the average 10% return. So yearly, the amount does not turn heads, but over time, it is noteworthy.
HSAs are easy to obtain. Those who are employed should inquire whether or not their employer allows its employees to contribute to an HSA. Those who are self-employed need to ensure his or her health plan is HSA eligible through a High Deductible Health Plan.
With all things, it is imperative to know the ins and outs of any insurance plan or savings plan, and it is just as important to fully understand all that an HSA can provide so you can utilize it to its fullest potential. Medical situations are stressful enough so don’t compound them by worrying unnecessarily. Be the less than ten percent who takes advantage of a plan that is in place by the IRS that actually helps people make money. Make your money work for you. For more specific information, contact me directly, so we can look into your unique situation. Let me help you save money and make money. Set yourself up for success, not stress.