How HSAs Can Help You Prepare for Rising Healthcare Costs

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

Health expenses are among the most unpredictable variables in our financial plans. A car accident, a severe illness, a workplace injury – all can lead not only to prolonged treatments but also to loss of income. Then, add on the usual expenses that are just part of living, such as prescription drugs, chronic illnesses, and annual check-ups. Things add up quickly. But that’s why we have medical insurance, right?  Well, medical insurance doesn’t always cover everything, and chances are that you’ll have to dip into your savings at some point. 

Unfortunately, medical costs have significantly risen, placing undue pressure on American households. 

The Rising Costs of Healthcare

The USA has the most expensive healthcare in the world, and it’s only gotten more expensive over the years. Way back in 1970, Americans spent a little less than $2,100 per year (in 2022 dollars) on healthcare expenses. By 2022, that figure had risen to $13,493, about a 551% increase. Unfortunately, many Americans simply can’t keep pace, with medical expenses being the leading cause of bankruptcy.

Per Capita Medical Costs

NHE Chart

How can we pay our medical bills without breaking the bank?

The most obvious and immediate answer is to purchase an insurance policy that provides the appropriate amount of coverage for your health and age status and try to prevent out-of-network bills from slipping through the cracks. 

But that’s probably not sufficient. Again, medical costs are rising across the board, including premiums, deductibles, and copays. If our salaries can’t outpace medical costs, we need something else that can.

But what can possibly grow faster than medical costs?

Since you’re reading this article and are well aware that we are a wealth management firm, you’ve probably guessed by now – investing. In the same time period, between 1970 and 2022, the S&P 500 rose by nearly 5,000%

There is one account in particular that can help you save on taxes and potentially accelerate the growth of your medical fund – the Health Savings Account (HSA). 

The Triple-Tax Advantaged HSA

Several retirement accounts offer tax breaks to help you save for retirement. A traditional IRA or 401(K) lets you defer taxes on your contributions, allowing them to grow unhindered by tax drag until you begin making withdrawals in retirement. The Roth variant requires you to pay taxes on your contributions upfront, but all subsequent growth and withdrawals are completely tax-free, provided you follow the withdrawal rules.

However, these plans are specifically designed to help you save for retirement.

An HSA is even more tax-advantaged than traditional or Roth retirement accounts because it allows for:

  • Pre-Tax Contributions: Contributions are tax-deductible or pre-tax if made by your employer.
  • Tax-Free Growth: Any growth within the account is not subject to taxation.
  • Tax-Free Withdrawals: Withdrawals for qualifying medical expenses are tax-free.

How It Works

You contribute to your HSA with pre-tax dollars. Within your HSA, you purchase investments that align with your financial goals and risk profile. This part is crucial: investing is inherently risky, and you may lose money by the time you need your funds, especially if you purchase riskier, more volatile investments. 

Therefore, it may make sense to think of your HSA as a long-term investment vehicle to pay for medical expenses later on. That SPY ETF you purchased last year probably won’t make much difference in your doctor’s bill a year or two later. 

If you have an HSA and are unsure of what assets to purchase, a financial advisor can help you choose the investments that fit your needs and horizon, as well as help you rebalance your portfolio to help mitigate risk. 

Finally, you sell assets and make withdrawals to pay for qualified medical expenses. 

Important Caveats 

As with everything else in the financial planning world, things aren’t as simply as they may immediately seem. These are the important rules you must follow to take advantage of an HSA. 

Qualifying Medical Expenses: Withdrawals must be used for qualifying medical expenses, or you’ll be taxed and penalized (20% penalty if under age 65).

Qualifying expenses include, but are not limited to, the following: 

  • Doctor’s office visits and consultations
  • Prescription medications
  • Hospital services and treatments
  • Dental care and orthodontics
  • Vision care (e.g., eyeglasses, contact lenses, eye exams)
  • Mental health services (e.g., therapy, counseling)
  • Certain long-term care expenses
  • Physical therapy and rehabilitation services

Medicare Enrollment: Once enrolled in Medicare, you can no longer contribute to an HSA but can still use the funds for qualified expenses.

Non-Medical Withdrawals: After age 65, non-medical withdrawals are taxed as ordinary income, similar to traditional retirement accounts.

HSA Eligibility Requirements

The IRS doesn’t allow just anybody to open and contribute to an HSA. Firstly, your insurance plan must be a ‘high-deductible’ plan, meaning any plan with a deductible over $1,600 for self-only coverage or $3,200 for family coverage means that you likely qualify for an HSA. 

HDHP Requirements and Contribution Limits for 2024
HDHP Requirements and HSA Contribution Limits for 2024
Plan Type Minimum Annual Deductible Maximum Out-of-Pocket Limit HSA Contribution Limit
Self-Only Coverage $1,600 $8,050 $4,150
Family Coverage $3,200 $16,100 $8,300
Additional Catch-Up Contribution (Age 55+) $1,000

Beyond deductibles, all of the following must apply:

  • Nobody can claim you as a dependent on their tax return for that tax year.
  • You can’t be enrolled in Medicare.
  • You can’t participate in a healthcare plan that is not HSA-eligible.
What Happens to Your HSA If You Change Jobs or Plans?

Don’t worry; your Health Savings Account and the funds in it will always be yours. However, suppose your new plan doesn’t meet minimum annual deductible limits. In that case, you won’t be able to contribute to your HSA any longer – but you can make withdrawals as necessary. 

Who Is The HSA Appropriate For?

In general, an HSA is often more appropriate for individuals who rarely have health problems and prefer to save for healthcare costs further down the road. If you end up at the doctor’s frequently, then perhaps an HSA isn’t for you. 

It may be better to participate in an insurance plan with a lower deductible but a higher premium. Of course, this is all highly dependent on your personal needs the options available to you. A consultation with an expert in medical insurance is highly advisable. 

In Conclusion

It’s hard to find an account with as many advantages as the Health Savings Account – it reduces your tax burden, allows for tax-free growth and withdrawals, and opens the door up to investments that may outpace rising healthcare costs. 

But it’s not for everybody. 

If you’d like to review your financial situation and determine if an HSA is the right choice for you, reach out today. We can not just help you make that determination but also help you purchase the correct assets within your account, rebalance it as necessary to reduce your overall risks, and integrate it into your broader financial plan. Just click the button below!

Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

Author

  • Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

    A Florida native, and full-time Sarasota resident, Ken founded WealthGen Advisors, LLC after spending more than fourteen years in the financial advisory industry. Ken holds multiple industry designations, as well as a master's degree in Financial Planning. Prior to founding WealthGen Advisors, Ken spent almost a decade in New York and then Texas as Vice President at The Capital Group, a $2T global investment manager serving institutional clients and pension funds.

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