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  • Mikayla Estes

HOW TO MAXIMIZE YOUR HEALTH SAVINGS ACCOUNT

What is a health savings account (HSA)?

A health savings account is a medical savings account that you can contribute tax free money into, up to a certain amount each year. In order to qualify for this savvy investment option, you must have a high deductible health plan. More people are choosing the health savings account option. According to the Centers for Disease Control, the number of adults between age 18-64 years old enrolled in high deductible health insurance with an HSA has increased from 4.2% in 2007 to 18.9% in 2017, but newcomers to HSAs may not realize all of the benefits.


How much can I contribute to my HSA?

An individual can contribute up to $3,600 into your HSA and a family can contribute up to $7,200 for 2021. There are two ways to contribute to your HSA. The first way is to transfer the money from your personal bank account into your health savings account. You will report your contributions on your tax return as a reduction of your taxable income. The second way you can contribute to your HSA is to have your employer withhold the funds from your paycheck and contribute the money into your HSA account. There are two benefits to the second way of contributing to your HSA. First, you are receiving the benefit of not paying federal and state income tax right now, instead of waiting until you file your tax return later. Second, the contributions will also be FICA and Medicare tax free as well. No other investment account has the ability to reduce your FICA taxes; this is unique to health savings accounts.


What are the other benefits?

Another HSA benefit is that the money rolls over every year. It is not a “use it or lose it” amount like a flexible spending account. You have the freedom to use funds for qualified medical purposes when these expenses arise. So, let’s say you go to the doctor and owe $200. If you decide to pay with cash and keep the receipt; you have the ability to reimburse yourself for the $200 whenever you want to withdraw the $200 from your HSA.


You might be asking, ‘I have the money in my HSA now, why would I not pay for the expense with my HSA the day I pay the bill?’ Well, here is the fun part, you can invest your HSA funds and create tax free earnings. Every HSA account is different, so you will have to check with your account provider and see what your provider allows, but once your HSA balance reaches a certain threshold everything in excess of the threshold can be invested. Some thresholds can be as low as $2,000 and others as high as $5,000.


If you are healthy, you can easily avoid spending the money in your HSA and allow that money to grow tax free. So, the money goes in tax free and grows tax free. It is a win/win.

If you are wondering what you are going to do with all that money, it only takes a quick online search to see how much people spend on healthcare over their lifetime. For instance, according to the US National Library of Medicine, the average lifetime expenditure for medical expenses for an individual is $316,600. If you think you are one of the healthy ones and will be below the average, well then good for you, instead of having to spend all of your HSA medical expenses the HSA can be used like a traditional IRA at the age of 65. The money you originally put in was tax free, so it will be taxed on the way out.


What else should I know about my HSA?

It’s important not to overcontribute to your HSA. If you overcontribute to your HSA in a tax year the penalty is 6% of the excess contributions each year the overcontributions remain in the HSA account. If you open an HSA account at any point in the year other than Jan. 1, make sure to pro-rate the contributions for the year. Similarly, if you switch to a non-high deductible health plan later in the year, you have to pro-rate your contribution amount from Jan. 1 to the last month of your high deductible health plan coverage.


If you spend the money in your HSA on anything other than medical expenses prior to the age of 65 you will be required to include the amount withdrawn on your tax return as income and pay a 20% penalty. If you are single and have an HSA account, when you pass away, the beneficiary will have to withdraw the funds and pay tax on the HSA balance they received. This is unlike an IRA that can be rolled over to the beneficiary’s IRA. If you are married the HSA balance will remain in the HSA account with no change.


The goal is to maximize your HSA as much as you can by having your employer withhold the contributions from your paycheck each pay period, maximizing your contributions each year, and paying cash for medical expenses as much as possible in order to keep your HSA balance high for investment purposes.


Mikayla Estes, CPA, is a manager at Arledge & Associates, an Edmond-based public accounting firm. Arledge & Associates is a recognized leader in the accounting industry offering practical solutions in the areas of tax planning, auditing, consulting, accounting advisory services and client accounting.


This article contains general information only and does not constitute tax advice or any other professional services. Before making any decisions or taking any action that might affect your income taxes, you should consult a professional tax advisor. This article is not intended for and cannot be used to avoid future penalties that may be imposed by the Internal Revenue Service.

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