The Hidden Powers of Your Health Savings Account
- The triple tax advantage of your HSA
- University HSA matching funds and contribution limits
- Investment options within an HSA plan
- How Medicare enrollment affects your HSA participation
When I was a child many years ago, I remember being asked the all-important question “If you could have a superpower—either Flight or Invisibility—which would you choose?” At the time, the answer was obvious: flight and the ability to soar among the clouds. Today that would still be my choice, but more so now to avoid flying through O’Hare. Though invisibility would be tempting, as well, especially for those lengthy meetings where you just want to disappear. What if I told you, regarding finances, you could have both…and more?
Pre-Tax Investing (Invisibility)
In the world of personal finance superpowers come in many forms. Think of the powerful tools of a 403b, a 401k, or an IRA and their ability to save on a pre-tax basis. Within your qualified employer plan, funds are invisibly moved over to the account before you ever see them and are matched by your employer. This allows you to postpone payment of taxes until retirement and continue to receive compound interest on the money you would have paid in taxes. The power of invisibility inherent in your qualified plan actively invests for your retirement without you having to lift a single finger.
Tax-Free Roth Investing (Flight)
The other option available in many university retirement plans is tax-free savings in a Roth account. You sacrifice the ability to deduct the contribution from your taxable income, but all your contributions grow tax-free for the future. In other words: your savings take off, flying to the skies. This unencumbered growth gives you liquidity down the road and provides tax-free distributions at retirement age.
When choosing between pre-tax investing (invisibility) and tax-free Roth investing (flight), you must consider your tax situation, time frame, liquidity needs, and anticipated changes in the tax laws, among other factors.
Have Your Cake and Eat it Too
You have likely heard of these investing options and are currently taking advantage of one or the other, if not both. What you may not know is that you may have an option through your university benefits plan that allows you to benefit from a triple tax advantage all in one savings account. The Health Savings Account (HSA) provides for:
- Pre-tax contributions,
- Tax-free or deferred growth on earnings, and
- Tax-free distributions for qualified medical expenses.
The HSA is not to be confused with another member of the League of Extraordinary Accounts: the Flexible Spending Account (FSA), in which you are required to use up the funds each year or lose them. Instead, the HSA allows you to carryforward your savings each year to be used at some point in the future for qualified medical expenses. Save the day by using your HSA to cover medical bills, doctor’s visits, and prescriptions while keeping your emergency fund and other liquid accounts fully stocked for the future.
HSA Contribution Limits
Each year that you are enrolled in a qualified High Deductible Health Plan (HDHP) you are eligible to contribute to an HSA through your paycheck. Some universities even sweeten the pot and add or match funds to your HSA every pay period. In 2021, an individual can contribute $3,600 each year and a family can contribute $7,200 each year. If you are age 55 or older, you can also contribute an additional $1,000 per year (and $1,000 per year for your qualifying spouse). Though university matching or additional contributions do count toward the annual limit, participating in this tax-advantaged savings vehicle is an undeniable win. The rules for HSA contributions can be complicated; seek advice from your tax preparer or a CERTIFIED FINANCIAL PLANNER™ if you have questions.
Above and beyond the HSA’s incredible savings abilities, it can also serve as an investment fund. Many HSA custodians allow you to invest excess funds in mutual funds, providing another avenue to save even more for retirement. Helpful and loyal, an HSA follows you wherever you go, even if you change employers or health plans.
Medicare Enrollment (Kryptonite)
There is a weakness for every power, and HSAs are no different. Medicare enrollment is the HSA Kryptonite. As soon as you enroll (and up to 6 months before you do) in Medicare or start drawing your Social Security benefit (which automatically enrolls you in Medicare) you are no longer eligible to contribute to an HSA, even if you continue to be enrolled in a HDHP. Many university professionals do not realize this and enroll in Medicare Part A because there is no premium. Not only can they not contribute to their HSA, but they lose out on any contribution their university makes on their behalf. Carefully weigh your decision to enroll in Medicare while you are still working and participating in an HSA.
While a Health Savings Account may not allow you to avoid busy transportation hubs or disappear at opportune times, it can help you achieve greater financial independence in retirement through its triple tax advantage structure. Consult with your trusted adviser or a CERTIFIED FINANCIAL PLANNER™ to see if you are eligible to participate in an HSA today.