2023 Q1 In Review - Integrity Wealth Advisors, Ventura & Ojai, California

HEALTH SAVINGS ACCOUNTS (HSA)
These triple-tax-advantaged accounts could help pay for health care in
retirement.
Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) both
allow you to set aside pre-tax funds to pay out-of-pocket qualified medical
expenses1—including co-insurance payments and deductibles, dental and
vision care, prescriptions, and many other health-related items. However, only
HSA funds can be used in retirement, among other differences.
Here are some ways that HSAs compare to FSAs and how best to take
advantage of an HSA's benefits.
YOU OWN THE ACCOUNT AND THE FUNDS IN IT
Your eligibility for an HSA or an FSA depends on if you're employed (and what
your employer offers if you are) and what kind of health plan you're enrolled in.
For example, self-employed individuals aren't eligible for FSAs, and only people
enrolled in an eligible high-deductible health plan2 (HDHP) can contribute to an
HSA.
An HSA is yours to keep indefinitely, even if you change jobs or retire—a
notable advantage over FSAs. At the end of the year, unspent funds carry over,
and the money remains in your account until you use it. You can also continue
contributing to your HSA as long as you're not enrolled in Medicare and are
covered by an eligible HDHP.
An FSA, on the other hand, is owned by your employer, and you lose the
account and forfeit any unspent money when you leave your job. FSA funds
often don't roll over to the new year either—with the exception of either a short
grace period or small carryover amount. Otherwise, any balance at the end of
the plan year is returned to your employer.
YOU CAN SAVE FOR RETIREMENT
As the name suggests, an HSA is a savings account where your money earns
interest. And once your balance achieves the minimum threshold set by your
plan, you can invest funds you don't expect to need immediately, making
an HSA a highly effective tax-advantaged strategy for medical expenses in
retirement.
An HSA offers a way for you to sock away triple-tax-free money for health care costs
in the future. Here's how:
1 Contributions to an HSA may be tax-deductible.
2 Interest on your account balance and capital gains and dividends on your
investments accumulate tax-free.4
3 You pay no tax on withdrawals for qualified medical expenses.
Typically, you can't use your HSA to pay for health insurance premiums. The
good news is that you can use your funds to cover premiums for long-term
care insurance and for many Medicare expenses, so consider contributing the
maximum amount each year as part of your retirement planning strategy.
YOU CAN USE YOUR HSA FOR RETIREMENT INCOME
Although you should use your HSA to cover medical expenses, you could use
the funds as an additional source of income in retirement. If you use HSA
funds for non-medical expenses after age 65, you'll pay only ordinary income
tax—a tax hit no worse than you would expect from an IRA withdrawal. Be
aware, however, that using funds on non-medical expenses before age 65
would leave you paying both ordinary income tax and a 20% penalty. If you're
not yet retired, speak with a financial planner or tax advisor before making a
move.
Source: Are HSAs the New IRAs? | Charles Schwab