Tax Secrets of Health Savings Accounts

From Laura Saunders

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To be eligible for an HSA, a worker must also have high-deductible health insurance. According to HSA specialist Roy Ramthun, many employees have deductibles of about $5,000 for a family and $2,500 for an individual, although the law allows up to $15,000 for a family and $7,500 for an individual for 2023. This insurance also has out-of-pocket maximums.

To reduce the deductible’s sting, the insurance is paired with a tax-favored savings account—the HSA. Either the plan participant or the employer, or both, can put pretax dollars into this account to pay the cost of out-of-pocket health expenses. For 2023, the maximum HSA contribution is $7,750 for a family and $3,850 for an individual, plus $1,000 for participants age 55 and older. (The HSA contribution doesn’t have to equal the insurance deductible.) Unused HSA dollars typically can be invested and grow tax free.

Now for a stunning tax twist: HSA owners who don’t withdraw from their accounts—either because they have low health costs or can afford to pay current expenses out of pocket—get tax breaks even better than the ones for IRAs and 401(k)s. There’s no tax on HSA dollars going in, tax-free growth of account assets, and no tax on withdrawals used to pay eligible health expenses.

HSA funds left in the account can compound for years. However, account owners who skip reimbursements as expenses are incurred can be reimbursed for them years later, as long as they keep receipts. They can also take tax-free withdrawals for retirement health costs such as Medicare premiums. Or HSAs can be a supplemental retirement account: at age 65 the owner can take withdrawals for nonmedical expenses and pay income tax on them, as with traditional IRA payouts.

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Children of parents with HSAs can qualify for their own HSA.

Say that Jane, age 23, is employed but still has health insurance through her parents’ high-deductible plan with an HSA. (Many children are covered by parental plans until age 26.) If Jane isn’t claimed as a dependent on her parents’ income-tax return, she can put up to $7,750—yes, the family amount—into her own HSA, even if her parents have funded their own. Jane doesn’t have to fund the HSA with her own earnings; someone else could give her the money for it.

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HSAs are portable

As with IRAs, HSAs are owned by individuals, not employers or insurers. If the fees offered by one sponsor are too high, the owner can move it to another.

More..

https://www.wsj.com/articles/hsa-taxes-health-savings-accounts-11664493292 (subscription)