HSA Strategy (Part 1)

As mentioned in the second paragraph here, today I will begin discussing Health Savings Accounts (HSA) with the goal being how to invest mine.

Here is a legal disclaimer for the current blog mini-series.* This is not professional advice and not intended to replace the advice of a tax advisor or attorney. HSA contributions, distributions, and eligibility are IRS-governed and subject to change. As the account holder, you are responsible for verifying eligibility, tracking transactions, and complying with IRS regulations. While some HSA funds are FDIC-insured, investment options are not bank-guaranteed and may lose value. Information provided here is [mostly] accurate at time of writing but subject to change based on new legislation or IRS guidance.

Given that disclaimer, let me define HSAs as tax-advantaged personal savings accounts for individuals enrolled in high-deductible health [insurance] plans (HDHP).

HSAs offer the triple tax advantage:

1. Tax-deductible contributions lower taxable income by corresponding amount.
2. Tax-free growth means interest or capital gains on investment are not taxed [unlike tax-deferred 401(k) earnings].
3. Tax-free withdrawals means proceeds used to pay for qualified medical expenses are not taxed.

Upon turning 65 years of age, HSA funds may be withdrawn for purposes other than qualified medical expenses but taxed as regular income [like the 401(k)]. If used for purposes other than qualified medical expenses prior to age 65, then HSA funds are taxed as regular income and subject to a 20% penalty.

Qualified medical expenses (always keep receipts as documentation) are rather extensive:

• Medical services including ambulance services, doctor visits, hospital stays, laboratory fees, surgery, and X-rays.
• Dental and vision services including braces, cleanings, contact lenses, dentures, eyeglasses, fillings, and LASIK.
• Prescriptions and OTC (no prescription required) products including acne treatment, insulin, and menstrual products.
• Equipment and supplies such as bandages, blood sugar test kits, breast pumps, crutches, hearing aids, and masks.
• Acupuncture, addiction treatment, chiropractic care, physical therapy, psychiatric care, and smoking cessation programs.
• Capital expenses to accommodate disabilities (e.g. grasp bars, railings, and ramps).
• Costs for [primarily] medical-care transportation and related travel (i.e. mileage, tolls, parking, bus/airfare).
• Doctor-recommended special education (e.g. tutoring for children with learning disabilities due to mental impairment).
• Medicare (ages 65+) premiums (A-D) [can no longer contribute once Medicare-enrolled but may spend existing balance].
• Premiums paid for COBRA [medical, dental, and vision] continuation coverage if job lost to a qualifying event.
• Premiums paid while receiving federal or state unemployment compensation.
• Premiums paid for qualified long-term care insurance subject to age-based caps on annual tax-free withdrawal amount.

I will continue next time.

* — In case my buddy Marc (with a “c”) is out there reading