Most years we max out our Health Savings Account (H.S.A.).* However, money drips back out of the account because we use it to pay for routine medical care. Fortunately, we spend less on medical care than we put into the account, so a balance has been growing. Ultimately, though, this is a pattern of two steps forward, one step back.
An H.S.A. coupled with a high deductible health plan (HDHP) creates a "triple threat" tax benefit. Contributions to the H.S.A. reduce taxable income, investment growth within the account is tax-free, and qualified withdrawals for medical expenses are tax-free. For 2022, those with self-only coverage can contribute $3650 and those with family plans can contribute $7300. Savers age 55 and older can make an additional $1000 catch-up contribution. If a saver wants to access the H.S.A. funds for a non-qualified expense--a non-medical emergency, for example--the saver may do so; however, the distribution is subject to a 20% penalty and income tax. Fortunately, once the saver turns 65, the 20% penalty for non-qualified expenses terminates.
While we have been taking full advantage of the H.S.A. tax deduction and tax-free withdrawals, we only have partially availed ourselves of tax-free investment growth. By using our H.S.A. to pay for medical bills as we go, we have been depleting the base upon which our H.S.A. savings can grow. Accordingly, in this year of abundance, we have ceased to tap the H.S.A. for routine medical care. The plan is for $7300 to go in and stay in.
Between my 401k and our H.S.A., we’ll be able to shield $27,800 in 2022 from income tax and have it grow tax-free/deferred. That’s pretty cool. And unlike my 401k, which is in a useful but boring target-date fund, my H.S.A. is linked to a brokerage account where I get to play! The account isn’t as fun as some of my other accounts because it doesn’t allow options trading, but other than that, the offerings are robust. Then, again, some might argue that my investment approach this year is quite dull, anyway. All I do is patiently and faithfully add to my position in Intel (INTC) every month…..
With Love,
P. Gustav Mueller, author of The Present
*Note: Actually, we have 2 Health Savings Accounts. I have one through my employer and contribute just enough to obtain the employer match. We have a separate H.S.A. for family coverage; that is the one we max out, less the contributions to my employer sponsored H.S.A.. For sake of literary ease, I have written about our H.S.As. as if they were one account.