Health Savings Accounts (HSAs) all the rage?

Health Savings Accounts (HSAs) seem to be all the rage. What are the pros and cons to use these to pay for health related expenses? Should you put them in your basket of financial tools?

HSAs are not for everybody. They are only for people who have a “high deductible health plan” (HDHP).

When you’re young, prior to age 65 when Medicare starts, other than the HDHP rules, they’re pretty straight forward.

When used to focus on health related expenses they work well. When it comes to savings and retirement – this is when more land mines appear.

Yes, contributions can be deducted from taxes, which is what attracts many people – but remember, tax savings are not the only consideration. Money can be withdrawn anytime for qualified medical expenses. HSAs should not be confused with Flexible Savings Accounts (FSA) which have a use-it-or-lose-it feature. Tax deduction of contributions though may NOT be deductible on some State tax returns, for example, they are not deductible for California taxes.

There is a 20% penalty for withdrawing money for non-qualified expenses or other non-medical reasons. This penalty goes away once you reach age 65.

Not all HSAs are alike. Fees vary. Investment choices vary. Financial institution expertise and administration vary. So they require a bit of homework.

HSAs are best used for those who are healthy and need less care, not for those who need more frequent or specialized care.

HSAs, because of the savings feature, may encourage some to focus more on the savings feature and ignore their own health by not using their health plan because they don’t want to use their HSA money.

Not understanding how medicines should be paid for under high deductible plans may cause other problems.

Finally, there’s a complex interaction between HSAs, Social Security and Medicare.

At anytime, should you pass away, your spouse can inherit your HSA. Can they actually use it though – since their health condition, etc. may not be the same as yours? And as for children as heirs -HSAs are terrible. The HSA becomes fully taxable as income to them the year of your death – period.

HSAs are useful in certain situations, and not so much in others. A careful evaluation should be done if you’re really contemplating putting one in place.

More on HSAs here including the question of saving it or spending it?

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2 Responses to Health Savings Accounts (HSAs) all the rage?

  1. Larry Frank, Sr. February 21, 2018 at 10:42 am #

    You may also hear of Medical Savings Accounts (MSAs) that integrate with Medicare.

    However, they are used with high deductible plans which means you pay more out of pocket = means if you use have to spend more, there’s not much that is going to stay in the MSA for very long to be able to take advantage of any tax advantages – and then you’re stuck paying higher deductibles.

  2. Larry Frank, Sr. September 3, 2019 at 3:32 pm #

    HSA contributions, etc enjoy Federal tax benefits. However, this is not true for all States

    Most state tax laws align with federal laws in regards to HSAs, with some exceptions. As of the end of the 2018 tax year, the following states had HSA tax laws that differed with the federal HSA tax laws: California and New Jersey.

    California and New Jersey do not offer tax-free contributions at the state level. Additionally, these states regard HSAs as regular taxable brokerage accounts. Thus, residents have to declare any capital gains, interest and dividends they receive to the state.

    No State Tax Deduction in CA and NJ – Interest and Dividends Taxed in NH and TN

    It’s worth mentioning that states with no income tax fail to provide a tangible STATE tax deduction for HSA contributions. Thus, residents in the following states receive no state tax deduction for contributing to an HSA: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.


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