Page 73 - BusinessWest February 21, 2022

Understanding HSAs
They Provide Investment, Retirement-planning Opportunities
By Garrett Kelly, CPA
Many people understand that a health savings account (HSA) is a tax-advan- taged medical savings account that
is paired with a high-deductible health plan. Contributions are tax-deductible, and the funds can be distributed out tax-free for quali-
bonds, mutual funds, etc. (depending on the HSA provider and HSA balance). An HSA invest- ed over a decade or two can generate some sig- nificant earnings that can be utilized for future medical expenses and/or treated as an additional retirement account.
Common Scenario: Couples Seeking Additional Tax- advantaged Retirement or Medical Savings
A common situation couples in their 40s
or 50s find themselves in is having the desire
for additional retirement savings and/or addi- tional savings for medical expenses that will be incurred during retirement. If a couple, both age 50, contribute each year the maximum contribu- tion limit to their family HSA, and never invest the funds, the balance after 15 years would be $118,000 (based on the 2021 annual family-plan contribution limit of $7,200, plus an additional $1,000 catch-up contribution once 55 or older).
However, if invested with an average annual rate of return of 8%, the balance, including earn- ings, would be $209,983. Not only would this couple receive a pre-tax payroll deduction, or above-the-line deduction, on their tax return for each year’s contribution, but they have multiple options as to how they can spend these funds after age 65.
HSAs
Continued on page 84
“An HSA invested over a decade or two can generate some significant earnings that can be utilized for future medical expenses and/or treated as an additional retirement account.”
fied, out-of-pocket medical expenses. If used for non-medical expenses, the distributions are taxable and face a 20% penalty.
However, many do not understand the invest- ment opportunities and retirement-planning opportunities that an HSA provides.
Most people who have an HSA are unaware that you can invest the funds in various stocks,
Once the owner of an HSA turns 65, the funds can continue to be distributed out tax-free and penalty-free for out-of-pocket medical expenses. However, once turning 65, the funds can be dis- tributed out for non-medical expenses as taxable distributions, similarly to how distributions from a traditional IRA would be treated.
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