Health Savings Accounts are by far one of the best tax accounts available. You receive a tax deduction through your contributions, you can invest the funds, they grow tax free, and you can withdraw funds tax free as long as they are used for medical expenses.
It's a win-win-win for you to contribute!
But there's a strategy, a bit more complicated, that might be even more advantageous to you.
Before explaining that strategy, let's lay out a few important points.
Just because you have a HSA that was set up a few years ago DOES NOT mean you can contribute to it now. You can only contribute to a HSA if you have a qualified High-Deductible Health Plan (HDHP). There are limits each year on how much you can contribute. There are tax penalties if you contribute to it when you are not supposed to OR if you over contribute to it. There are also penalties if you take funds out that are NOT qualified medical expenses.
Funds coming out of the account need to be used for qualified medical expenses. The list is quite large, but to be sure, here are a couple of resources from the IRS:
For example, I learned that nutritional supplements are not deductible unless they are recommended by a medical practitioner as treatment for a medical condition. Toothpaste is not a deductible medical expense.
Consider your typical medical expenses and look over the list. You could be reducing your taxes by an extra few hundred dollars each year by contributing & adjusting how you pay for certain medical expenses through your HSA.
The Other HSA Strategy: Tax-Free Retirement Account
Let's say you max out your HSA every year as a family. For 2024, that's $8,300 plus another $1,000 if you are 55+. You typically use it for any medical expenses you have so your HSA account fluctuates based on your contributions and withdrawals.
Did you know that you can pay for those medical expenses out of pocket (not from your HSA account) and then reimburse your self at any future date?
So you go to the doctor and the bill is $500. Instead of using your HSA, you pay out of your checking account. You save the receipt, organize it, and make a note. You do this over and over with all your medical bills. You invest your HSA so that it grows tax-free.
Then say in 10 years, you are retired (you don't have to be retired for this strategy, this is just an example). Instead of taking money out of your 401k/IRA and having to pay more taxes you can instead reimburse yourself from your HSA! Over those 10 years, let's say you have $15k of medical expenses paid out of pocket and you had an HDHP during those years. Well, now you can reimburse yourself tax free. The $15k of HSA funds that would have paid for those expenses has grown tax free to $30k!
By doing so you saved on taxes from your contributions each year, and now you have another $15k of tax free funds to reimbure yourself! The tax savings is worth thousands.
Instead of retirement, let's say you are 30 right now, and put this strategy into place. Fast forward 10 years and you have that $30k in the HSA. Maybe money is tight, you don't have enough for a non-medical expense that came up, or you want to surprise the family with a vacation, but it is more expensive than you thought. Well, this HSA reimbursement strategy would allow you to take out those HSA funds (match the previous medical expenses) and use the current withdrawal to fund your vacation!
So what's the drawback?
You have to have other funds (out of pocket/checking/savings) to pay for those medical expenses instead of the HSA.
You have to keep track of all those expenses meticulously so that you can properly reimburse yourself months or years later.
If you/your family is very healthy and you end up with fewer medical expenses than your HSA balance throughout your life.
This strategy might not be for you right now if you don't have a solid emergency fund.
This strategy might not be for you right now if you don't have the savings/cash flow to pay for the medical expenses out of pocket.
This strategy might not be for you right now if you are financially unorganized and feel that you would do a poor job keeping track of receipts, dates, and medical expenses.
You could always take money out of the HSA for non-medical expenses and face the taxes and 20% penalty at that time. This is not ideal, but a response to drawback number 3.
In this strategy, your HSA becomes like your Roth IRA - you contribute to it, but don't want to use any of it since the goal is for the money to grow tax free.
Flexibility in the Strategy:
You could create a strategy where you have your HSA bank account with enough funds to cover your deductible and then the rest of the HSA funds in a HSA investment account. That way you are focused on growing most of the HSA funds, but have some HSA savings in case you need/want to use it to cover current medical expenses.
The beginning of the year is a great time to start this strategy because you can remember when you started keeping track of all your medical expenses, the dates, receipts, and how you paid for the medical expense.
Please reach out if you have questions about the "Other HSA Strategy!"
Blake Jones
(385) 398-4015
Pomegranate Financial LLC is an Investment Adviser registered with the State of Utah. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets, or developments mentioned. From time to time, we may have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us at (385) 398-4015 if there is any change in your financial situation, needs, goals, or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from PF with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.pomegranatefinancial.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.
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