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Retirement, Investments, & Insurance for Individuals Build your knowledge What
is an HSA and what are the benefits of an HSA?


WHAT IS AN HSA AND WHAT ARE THE BENEFITS OF AN HSA?

A health savings account (commonly called an HSA) offers tax benefits for today,
and an opportunity to invest and grow your savings for the future. Here’s how it
works.


May 03, 2024


QUICK TAKEAWAYS

 * An HSA offers multiple tax advantages, including lowering your taxable income
   and allowing you to take tax-free distributions for qualified medical
   expenses.
 * Funds in an HSA may be rolled over from year to year and may also be invested
   for potential growth, if allowed by your plan.
 * HSA funds may also be used in retirement for medical expenses as well as
   other non-medical expenses and can be included in an estate plan.



More and more people—some 72 million Americans —are covered by a health savings
account, or HSA. If you’re one of them, it’s crucial to understand how an HSA
fits into your financial goals now, and how it can serve as a useful tool for
retirement, too.


WHAT IS AN HSA?

Simply put, an HSA is a triple tax-advantaged savings account for your medical
expenses. You are only eligible for an HSA if you are enrolled in a
high-deductible health plan (HDHP) that offers one. HDHPs have lower premiums
but come with higher deductibles. So, many people contribute to an HSA because
of the tax advantages and to set aside funds for qualified medical expenses. (In
some cases, an employer may contribute to an HSA, too.) They may also see an HSA
as a retirement investment account. (More on that below).


WHAT DOES AN HSA COVER?

An HSA covers qualified medical expenses. Those may include copays, dental
costs, prescriptions, eyeglasses and contacts, flu shots, hearing aids, and even
crutches.


AM I ELIGIBLE FOR AN HSA?

Anyone enrolled in a high-deductible health plan that meets certain requirements
may open an HSA. Those requirements include:

 * you do NOT have other health coverage such as Medicare or another non-HDHP
   plan or
 * you are NOT claimed as a dependent on someone else’s tax return.

In addition, the IRS sets minimum deductible and maximum out-of-pocket cost
limit for HSAs, which often change yearly.


WHAT ARE THE TAX ADVANTAGES OF AN HSA?

HSAs have three tax advantages, which is why they’re often referred to as triple
tax advantaged.

 1. Lower taxable income: Because HSA contributions are made with pre-tax
    dollars, your current taxable income is reduced.
 2. Tax-free growth: While the money is in your HSA account, you do not pay
    taxes on any interest or potential growth.
 3. Tax-free withdrawals: Payments for qualified medical expenses can be made
    tax free, either while you’re working or if you’re retired.


WHAT ARE THE CONTRIBUTION LIMITS OF AN HSA?

Annual contribution limits for an HSA depend on what type of plan you have, and
if you’re covered as an individual or family. In addition, people age 55 and
older can make additional catch-up contributions to an HSA. (If your employer
contributes to an HSA, those funds are considered part of a yearly contribution
limit.) And, you do not have to use the funds in an HSA each year, so they can
rollover.

 * 2024 HSA annual contribution limits
   * $4,150 for a self-coverage (individual) HDHP
   * $8,300 for family coverage HDHP
   * $1,000 for catch-up contributions if age 55 and older


DO HSA FUNDS ROLL OVER FROM YEAR TO YEAR?

Absolutely: Your HSA belongs to you, no matter your job or your employment
status. If you don’t need to use all the savings in one year, you can use it in
the next. You can also take HSA funds with you if you switch jobs. In that case,
you may be able to either rollover the funds to your new account or open a
separate HSA if you’re enrolled in an eligible health plan.


CAN I USE MY HSA FOR QUALIFIED MEDICAL EXPENSES FOR DEPENDENTS?

Yes. HSA funds can be used for qualified medical expenses incurred by your
spouse and dependents, including children, stepchildren, and other IRS-defined
dependents, even if they aren’t covered by your HDHP.


WHAT IS THE DIFFERENCE BETWEEN AN HSA AND AN FSA?

While both HSAs and flexible spending accounts (FSAs) offer tax advantages for
qualified medical expenses, there are key differences.

 * An HSA:
   * requires enrollment in a high-deductible health plan,
   * rolls over contributions from year to year,
   * stays with you even if you change jobs, and
   * offers various investment options.
 * An FSA:
   * has use-it-or-lose-it contributions tied to a specific calendar year that
     don’t carry over,
   * must be offered by your employer,
   * has no investment component, and
   * works best for short-term medical needs.


CAN I INVEST MY HSA FUNDS?

You can use your HSA both to budget for current expenses and to meet retirement
goals in the future. Say you contribute the full amount to your HSA. Whether you
need some, all, or none of the savings for qualified medical expenses, you can
choose to invest some or all the HAS funds once you reach your plan’s investment
threshold. Both the contributions and any growth are not taxed while in the HSA,
and withdrawals for any qualified medical expenses aren’t taxed either.


CAN I USE AN HSA IN RETIREMENT?

With some planning, and if you don’t need the funds to pay for expenses while
you’re working, you can start to think differently about your HSA. “The real
power in an HSA is its compounding and growth,” says Sri Reddy, senior vice
president of retirement and income solutions at Principal®. “Treating it as an
investment when you’re working pays off when you’re ready to retire.”

Let’s say you open an HSA when you’re 40 and save the maximum per year,
including the catch-up contribution starting when you turn 55. You’re also able
to treat your HSA like a true retirement vehicle and pay for medical expenses
with other funds in your budget. If you start saving $3,600 per year when you're
40, then save $4,600 starting when you're 55, you'll have more than $200,000 by
the time you're 65. This includes the growth of your funds in your investments.
(These scenarios are hypothetical and assume an annual return of 6%.)


HSA TAX AND INCOME ADVANTAGES AFTER AGE 65

Once you reach age 65 and enroll in Medicare, you can no longer contribute to an
HSA. But an HSA comes with four main retirement tax advantages. “If you don’t
end up using it before retirement, an HSA behaves, tax-wise, no differently than
a 401(k),” Reddy says.

 1. You can take tax- and penalty-free HSA distributions for a range of
    qualified medical expenses (PDF). Those include:
    * IRS-qualified health care premiums for Medicare Parts B, C, and D
    * Medicare deductibles, co-pays, and co-insurance
    * qualified long-term care insurance premiums
    * dental and vision expenses
    * hearing aids
    * insulin and diabetic supplies
    * over-the-counter medicine and medical equipment and supplies
 2. Distributions aren’t included in modified adjusted gross income. They won’t
    affect retirement-related taxes such as the Medicare premium surtax or
    Social Security benefits.
 3. You can use HSA distributions to pay for nonmedical expenses after age 65.
    Those payouts aren’t tax free but are taxed at the same rate as
    distributions from a traditional IRA. So if you don’t need the savings for
    medical costs, you can use the funds to cover unexpected budget items, for
    example. And unlike Social Security or required minimum distributions
    (RMDs), there’s no age by which you’re required to use HSA funds.
 4. You can plug your HSA into your estate plan. Just like a traditional IRA,
    when you set up an HSA, you name a beneficiary who receives any unused funds
    after you die. If the beneficiary is your spouse, they’ll receive the tax
    benefits, too.


WHAT’S NEXT?

Unsure how your health savings account fits into your retirement planning? We
can help. Log in to your account to connect with financial professional
resources to help.

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--------------------------------------------------------------------------------


FOOTNOTES

American Bankers Association Health Savings Account Council

Principal® does not make available products related to Health Savings Accounts.

The subject matter in this communication is educational only and provided with
the understanding that Principal® is not rendering legal, accounting, investment
or tax advice. You should consult with appropriate counsel, financial
professionals, and other advisors on all matters pertaining to legal, tax,
investment or accounting obligations and requirements.

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