It probably doesn’t need to be said that healthcare in the US can be expensive or that everyone will need healthcare services at some point in their life. Recognizing this, in addition to your New Year’s Resolutions to go to the gym and eat healthier, it’s a good idea to take steps to be prepared to handle future healthcare expenses. Properly using the following financial tools can manage future costs, preparing you for whatever lies ahead.
Health Savings Accounts (HSAs)
An HSA is a tax-advantaged savings account to pay for your healthcare expenses. The money you don't spend in one health plan year rolls over to the next. You can have a Health Savings Account if you are also enrolled in a High Deductible Health Plan (HDHP).
A large draw for many is the tax benefits inherent to HSAs:
- Contributions through an employer are always pre-tax.
- You can invest the funds after your account balance reaches a certain level.
- Distributions for qualified health expenses aren’t taxable.
Unlike a Flexible Spending Account (FSA), which is funded with pre-tax dollars but must be used by a specific deadline, contributions can remain in your account to be used for future medical bills at any time. In short, this means there is no "use it or lose it" penalty.
Keep in mind that if you spend your HSA funds for non-qualified expenses, you may be required to pay ordinary income taxes, and if you do this before age 65, you may also pay a 20% penalty. Finding qualified uses for these funds in retirement should not be a challenge because, according to a recent Fidelity study, an average retired couple aged 65 in 2021 will need approximately $300,000 saved (after tax) to cover health care expenses.
HSA contributions are exempt from federal income tax, and for most, state tax as well.
HSA Contribution Limits
HSA contribution limits are adjusted annually for inflation. For 2022, the self-only contribution limit is $3,650 or $7,300 for families. This is a $50 increase for individuals and a $100 increase for families from 2021. The contribution limit includes contributions from both employers and employees (or family members). For those 55 and older an extra $1,000 can be contributed. If both spouses are older 55 or older contact your HCM advisor to see how to contribute even more.
These adjustments are rounded to the nearest $50 to account for inflation rates, which are determined using the Consumer Price Index for All Urban Consumers.
How to Use Your HSA
The IRS or your HSA provider are great resources when getting started. For example, the IRS recently issued a reminder that at-home COVID-19 tests, face masks, and sanitizing wipes can all be purchased or qualify for reimbursement through an HSA. In addition, the IRS offers an interactive assessment tool [KH1] that can take the guesswork out of what qualifies as an HSA-friendly expense.
Flexible Spending Accounts (FSAs)
With an FSA, you deduct pre-tax dollars out of your salary to pay qualified medical expenses. You can designate an FSA for your healthcare expenses or those of a dependent. But most FSAs are "use it or lose it"—at the end of the plan year, the money left in the account doesn't roll over into the following year. Employees tend to minimally fund FSAs, although they can be used in conjunction with HSAs.
Consolidating Medical Procedures
If your medical expenses are more than 7.5% of your Adjusted Gross Income (AGI), you may be able to use them to cut your tax bill. This includes payments to doctors, dentists, surgeons, mental health practitioners, and other medical bills. It can also extend to hospital care, nursing home care, additional programs, prescription drugs, insulin, and more. For some, this incentivizes bunching eligible medical procedures within a single tax year rather than spreading them across multiple years when they might not meet the threshold.
If you're considering this option, you will want to keep good records because you need to itemize these costs along with your other deductible expenses. There's no carry-over. If you can arrange them so that your charges get over the government’s hurdles, it can be to your advantage when tax time comes.
Whether you consider taking on an HSA, FSA, or consolidating your medical expenses, it may be helpful to reach out to your HCM Advisor to talk about these options as the new year is kicking off.
| Steve Hengehold CFP® RICP®
Steve has been with HCM since 2014. He is dedicated to helping people understand their necessary commitments and moving them towards their goals. He loves helping clients to focus on their passions. When not at work, Steve enjoys playing guitar, reading, deferring taxes, compounding investment returns, fishing and SCUBA diving.