Health Savings Accounts (HSAs) – what you need to know

Ben (00:05):

Welcome back to the Retirement Tax Podcast, aka the least boring tax podcast. I hope you’re telling all of your friends to subscribe to the least boring tax podcast ’cause we love to see how the show is growing. I am your humble co-host, as always, Benjamin Brandt joined as always by my even more humble, the most humble co-host Steven Jarvis. Steven, how you doing today?

Steven (00:25):

Well, I’m doing great. I’m definitely the most humble. Yeah, that’s for sure.

Ben (00:28):

That’s right. And you’re the humblest guy I know that has 14 dozen first place medals hanging directly over his shoulder. It doesn’t get more humble than that. But we’re not talking about how humble we are today. We are talking about a listener question that a financial advisor wrote in that works with Steven, and it actually made us think that we haven’t actually covered the nuts and bolts of an HSA in several episodes. So we thought we’ll tease the listener question that’s actually from a financial advisor for the end. But we’ll use this opportunity to kind of go through why HSAs are God’s gift to retirement savers. What do you think of that, Steven?

Steven (01:03):

Yeah. Sounds like an exciting episode to me, but then I like to nerd out on this stuff. So here we go.

Ben (01:08):

We talk about this stuff when we’re not recording, right? So, yeah, I mean, obviously we’re excited. So, what’s so great about HSA Steven, I’ve got one and you’ve got one, but why do we have ’em?

Steven (01:16):

Yeah. HSA- health savings accounts are great because they have an extra tax advantage even over IRAs. And yes, there’s this slight limitation of you have to use it for qualified medical expenses, but it turns out over our lifetimes, we all usually end up with quite a bit in medical expenses. So it’s a pretty good advantage to have. So, we talk about HSA having kind of this trifecta of tax benefits and those three potential tax benefits, and I say potential for a reason, are that we can get a tax deduction for funding the HSA are, when we invest those dollars, they can grow tax free. And then, and this is the really cool piece that’s unique to HSAs, is that we can also use those funds tax free, including the growth as long as we’re using it for qualified medical expenses. So as long as we have a really intentional approach to this, then we can get all three of those tax advantages from having the account.

Ben (02:16):

Yeah, it’s a Roth IRA for health except it’s even better and that we can deduct what we put in, whereas you can’t in a Roth. And I think when we think about, you know, getting older, I’m getting older, it seems almost every day I’m getting older. Medical things are where you wouldn’t think about them in your twenties and thirties, your forties, fifties, and sixties. You’re gonna need this money at some point. Why don’t we pres save for it on a hyper tax advantage basis? And we know that at some point we’re going to, ourselves or our spouses are going to need this. And then we can even go the step further. You know, we have our HSA unless we take the final step, we don’t get the full juice worth the squeeze out of the HSA is that we could potentially even invest those premiums that we set aside. So a lot of different ways to win with an HSA.

Steven (03:01):

Yeah. Before we get too much further, we should clarify that you can’t just go out and pick an HSA on your own just because you want to. There are like any tax advantage accounts, there are some rules we need to follow. And with an HSA, one of those really important rules is that when we’re contributing to an HSA, we have to be participating in a high deductible health insurance plan. And there’s some different criteria for what qualifies as a high deductible plan. My recommendation is always that you ask the provider if it’s a high deductible plan because it’s not just one set dollar amount. We can quote, there’s a couple of things in there about how much the premium is versus how much the deductible is the out-of-pocket expenses. And so we want to, before we just go open up an HSA and start funding it and thinking we’re all set, we wanna make sure, okay, we do in fact qualify to contribute, but as long as we’re participating in a high deductible plan one of the interesting things about HSA is you don’t even actually have to have earned income, unlike an IRA.

(04:02):

And so, we’ll save this for a little bit later in the episode, but we’ll talk about this idea of a Super HSA and we’ll bring it back to why that that not needing earned income is important.

Ben (04:12):

Yeah, that’s great. And I think it was you that once told me that, you know, every rule, there’s an incentive, there’s somebody on the other end of that rule. The rules exist for reason. So while it’s annoying that we have to have a certain kind of health insurance if we want an HSA, which I think most of our listeners are gonna want an HSA, you know, it’s not unheard of. We can’t contribute to a Roth area if our income is too high or we have to jump through some loops. We can’t have a deductible traditional IRA unless you know your income’s within some range and you don’t have access to when it works. So this isn’t unheard of that there’s sort of a, something that we want, but there’s loopholes or there’s hoops to jump through when we think about an HSA, it works in intended with the high deductible plan.

(04:49):

So the HSA I assume was born out of my deductible is really high. I want a tax advantage ways to save up for that deductible in advance, assuming that I’m gonna need it. Now, as advisors and as CPAs, we’re taking this to kind of an extreme degree to say, we’re gonna max fund this thing and we’re actually not going to use it for its intended purpose of I got a thousand dollars medical bill. I dip into this thing. People that really have success with their HSAs cashflow, those costs as they pop up, they keep their contributions in the account and then they invest them. So that’s where we’re getting this Roth IRA aspect of the account is that we’re putting in the seven or 8,000 whatever we can put in a year. And then we’re just doing that over decades and letting that grow, investing it in, you know, growth stocks or whatever it is you wanna invest in mutual funds, index funds, whatever.

Steven (05:36):

Yeah, A lot of really great points in there, Ben. I remember the first time I personally had an HSA, it was my first job out of college. And the way the HSA was explained to me by our payroll department was, oh, this is how you’re going to pay your out-of-pocket expenses during the year. And so they presented it to me as you’re gonna get a tax benefit for being able to pay the expenses you are already going to pay. Which is fine, but if you approach it that way, and the way they presented it to me, this is the way I see a lot of people approach it, you’re only getting one of the tax benefits because now you’re getting a tax deduction for some medical expenses. But if I use up those funds every year, I’m not investing it.

(06:15):

It’s not growing. And then I guess, so technically you’re also able to use those funds tax free, but we’re really missing out on that whole growth piece. And so, to your point, from a cashflow standpoint, if we can cover those expenses from another source, now we can let this grow tax free. And I always get the person who will say, well, what if I end up with too much in my HSA and I haven’t met that person yet. Yeah, I haven’t met that person yet. I haven’t met people who’ve ended up with tens of thousands in their HSA with six figures in their HSA, but again, in retirement, two biggest expenses, taxes and medical. Most likely at some point you’re gonna need those dollars. And the great news is this is not a gamble.

(06:56):

If we go through our life and we end up with more in an HSA than we need for medical purposes, we have a couple of options. Those funds don’t just go away. When you turn 65, you can essentially look at this as an IRA that you can now you’ve deferred the taxes and if you don’t use them for qualified medical expenses, you will have to pay income tax, but you won’t pay any penalties. And so this is not some gamble where we’re rolling the dice and hoping for the best. This is a really a great potential strategy that sets us up for some tax savings.

Ben (07:28):

Well, and I think if we were even, you know, if we had some amazing bull market or something where we had some crazy growth, even on the run up to retirement, you could say, I don’t think I’m going to spend all this money. Couldn’t you then just save some receipts from the medical things you were doing anyway and then just say, I’m actually gonna post retirement. I’m gonna cash these in like a little coupons or something. Right. Can we still do that?

Steven (07:48):

Yeah, that’s a great point, Ben, that there’s not a time limit on when you can claim reimbursements through your HSA. So there’s a couple of important things we need to keep in mind. But, let’s say I opened my very first HSA I opened I think in 2010, I think it was the year my daughter was born. And so from the time I opened the account going forward, any medical expense that I have a receipt for, which you can get a lot of those online, so they’re not that hard to go back and find. So any medical expense since then that I have a receipt for, and that hasn’t already been reimbursed by an HSA, I can go backwards and go all the way back to 2010 and say, now I would like that reimbursement. And so, yeah, if we get to later in life and we haven’t used a lot of that, we can start looking backwards. And again, there’s no time cap on that. So right now that would be 13 years ago. I’m looking, I can get another 40 years from now and still potentially go that far back. And so that does make it a lot more flexible, a lot more useful for us as far as how we look at taking advantage of it.

Ben (08:50):

That’s fantastic. Interesting. So the better your record keeping skills and the better you are at hoarding digital receipts and things like that, the less taxes you’re gonna pay in retirement. That’s true for the HSA, that’s probably true for a lot of areas, I suppose.

Steven (09:02):

Yeah. And like so many things, the IRS doesn’t appreciate double dipping and by doesn’t appreciate, I mean, doesn’t allow it and is going to come after you most people I work with aren’t getting medical deductions as an annual deduction on their tax return ’cause the standard deduction is so high. But we do need to keep in mind that if you get into a situation, you’re in that 10% of taxpayers who actually itemize. And from there it’s an even smaller percentage who are able to deduct medical expenses. If you’ve deducted a medical expense on your tax return, you can’t also have it reimbursed through HSA.

Ben (09:34):

Yeah, that gets tricky. I would say if your income is over a hundred thousand dollars as a couple and you haven’t had an extended stay in a hospital this year, it you’re probably not gonna deduct any medical. Yeah, probably your deductibility starts at that income at $7,501.So it’s tricky. The higher income is the less likely you’re gonna deduct anything medical, which is the way it is, whether we think it’s good or better indifferent. So.

Steven (09:57):

Well, and Ben, let’s go back and clarify really quick. You made a comment about the seven or $8,000 that we can put in every year. Again, I’m the tax nerd here, so I’m gonna go ahead and throw out what the real numbers are because it’s not the same for everyone. It’s not like for an IRA where we have a set per individual, here’s the max you could put in if you have earned income on the HSA side, it’s a two step process. So the first step we’ve already talked about is are you participating in a qualifying plan? But then we have to look at do we have single or do we have individual or do we have family coverage under that plan? And this is not the same as, am I filing single or am I filing married filing jointly or married filing separately?

(10:37):

Totally separate consideration. So, if I’m participating in a high deductible plan or that qualifies and I only have individual coverage, the contribution limit for 2023 is $3,850. If I have family coverage, which that could be my spouse on the plan, that could be a child on the plan. That could be four children on the plan. It doesn’t keep going up with the more people I have, it’s just do I have individual or do I have family that that contribution limit doubles. And so now our contribution limit for 2023 is $7,750. Now there is also a catch up, like so many other things, the catch up for HSAs starts at 55 and it’s an extra thousand dollars per taxpayer. So if my wife and I are both over the age of 55 and we have our own HSAs between the two of us, we could get to as much as $9,750 that we’re putting in every year to this HSA.

Ben (11:34):

It’s a significant amount of money when you think about, yeah, you know, essentially $10,000 a year, you know, you invest that for a decade in your, it doesn’t take long until you’re dealing with some pretty serious dollars in tax-free, potential tax-free, well, I don’t wanna say income, but access to tax free cash in retirement. If you follow a couple simple rules.

Steven (11:53):

Yeah, we do need to keep an eye out for when we start looking at Medicare. Medicare is not a high deductible plan. So there’s some transition guidance in there that you make sure we’re keeping an eye out for those we definitely wanna make. Or if we’re changing jobs or changing insurance, we wanna make sure that we’re keeping an eye on those kinds of things. I want to really quickly talk about this idea of a super HSA ’cause it just came up with a client I was working with this last week, and then we’re gonna jump to that question that we mentioned. So this was introduced to me a couple of years ago as far as the terminology of a Super HSA, but it’s a pretty narrow set of circumstances, but potentially really powerful and similar to like a backdoor Roth contribution.

(12:33):

I don’t think this opportunity was created on purpose. I think somebody realized that you could interpret the rules this way and the IRS has acknowledged that you can in fact approach it this way. And so the way a super HSA would work is if, so let’s use my personal example. So if I have a high deductible plan that I have an adult child who is also on the insurance plan but is not being claimed as a dependent. And so typically what this looks like is when you have college aged children who now are filing their own tax return, they’re claiming themselves as a dependent, but they are still on your insurance, we can use that same insurance policy for you to contribute up to the family limit as well as for your child to contribute through their own HSA. We’re using the same insurance plan, but we’re contributing through different tax returns essentially.

(13:31):

So again, there’s a couple of really important caveats in there that it needs to be someone who is not a tax dependent but is still on your insurance plan so that they have the qualifying coverage to be able to contribute. And so this most recent situation that came up with a client, and this is where I see this come up most often when it gets implemented, is when you have parents who are looking to help their kids get set up for the future. ’cause Most people in their early twenties are probably not looking at, Hey, how do I save as much as possible on taxes? They might not be too terribly excited about putting away an extra three or four or seven or $8,000 in HSA funds. It’s a great opportunity for parents who are looking to set their kids up for the future to maybe even make a gift on their behalf to help them fund their HSA.

(14:23):

And the great news is that we would be under the gifting limit for the year if there aren’t other gifts that we’re giving. And so not only is this not taxable, that gift is not taxable to your child, you wouldn’t even have to fill out the IRS form 709 to report a gift for the year. So again, really narrow set of circumstances where that might apply, but it’s potentially a great opportunity if you find yourself in that situation. So, to keep in mind, and for those of you listening along, there’s a reason I’m the tax guy and not the tech guy. Somehow we’ve lost Ben in this recording. So I’m gonna go ahead and finish out and we’ll make sure that Ben gets brought back in for the next episode. I promise. He is fine. We’ll get him back on just as soon as we can.

(15:11):

Alright, so the question that we had talked about that came in from a financial advisor who follows along with what we do the situation he describes is, okay, so the husband passed away earlier in the year and has an HSA worth $20,000. The wife who his surviving spouse also has her own separate HSA, but the husband didn’t list the wife as a beneficiary in the HSA. And so the way that it’s set up, the husband’s HSA is gonna pay out the $20,000 to the estate, which then the wife ends up with. So the question that the advisor asked is, is the surviving spouse able to take that $20,000 and put it in her own HSA or does she have to pay taxes on that and move on? And this is obviously a really specific situation, but not one that’s unheard of.

(16:03):

And so, it’s a great reminder to make sure that you are checking the beneficiaries are assigned on your accounts, whether that’s an HSA or an IRA or whatever else it might be. Make sure that beneficiaries are assigned because in the case of an HSA, this is an individual account. Even when you have family coverage, even when you have a married couple, the HSA is going to be in one of your names or potentially you have separate HSAs in each of your names. And so we’ll call the husband Bob and the wife Sue, because that’s all of our fictitious clients. So since Bob didn’t name Sue as a beneficiary, when he passes away, all that Sue is left with is paying, essentially taking that income and reporting as taxable income. She does get one year to potentially identify previously unreimbursed medical expenses that Bob had and use that $20,000 towards those expenses.

(16:55):

But she is not able to put that into her own HSA if Bob had named her as a beneficiary, and this is, this is only true for spousal beneficiaries, then Sue wouldn’t be able to roll the balance into her own HSA, but that she would essentially take over that HSA and it would now be in her name. She would have two separate HSAs. So, super critical that the spouse is named as the beneficiary. We can’t just assume that, oh, well we’re married, so of course she’s gonna get it and use it. However she would like, we lose some of the tax advantages if we haven’t named somebody specifically as the beneficiary. So it’s worth double checking, worth taking a look at to make sure that’s getting covered and really appreciate Daniel sending in that question.

(17:41):

And the reason we bring it up on this podcast, even though Daniel’s a financial advisor working with a lot of great clients, is just to illustrate that there is a lot of complexity here. There’s a lot of issues out there that that need someone who’s really paying attention to the details. And this isn’t to a highlight that Daniel had a question he didn’t know the answer to because the fact that he is asking the question is a great example of the kind of people you do want on your team, someone who’s gonna help make sure that you find the answer. And I know for a lot of our ins, our listeners, your DIYers and you are that person on the team and that’s great too. But somebody’s gotta be paying attention to these details to make sure they’re getting handled correctly. Last thing I wanted to cover related to HSAs before we wrap up is this potential opportunity to do essentially an IRA conversion with HSA dollars.

(18:33):

Now this is, again, this is a really narrow kind of limited opportunity of when this can be done and how it works. But there is a potential to roll some of your HSA dollars into an IRA if you get into that situation where you’re not expecting to use all of your HSA dollars for medical expenses, but we wanna make sure that we’re looking at the rules that this is an intentional and thoughtful approach and that we’re making sure it really applies in our situation. And so if we end up that situation where we’ve got more HSA dollars than we plan to spend on medical expenses, it’s worth looking into to say, okay, what were the requirements there? Is that something that would potentially make sense that we can get some of those dollars into an IRA that could be used a bit more flexibly than just for qualified medical expenses? Alright, thanks for listening in this week. I’m gonna go find Ben and what happened to the technology. Until next time, don’t forget to not let the tax man hit you or the good Lord split you.

Steven (Disclaimer) (19:38):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.