A key retirement tool just got better — thanks to inflation
How much you can contribute next year to your health savings account (HSA) is increasing by $200 for individuals and $450 for families — thanks to hot inflation.
The annual inflation-adjusted limit on HSA contributions for self-only coverage under a high-deductible health plan will be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, up from $7,300. That’s roughly a 5.5% increase over 2022 contribution limits, versus just a 1.4% gain between 2021 and 2022.
The hike comes just as many workers are picking their health care benefits for 2023 during their employer’s open enrollment season and provides another avenue to super-charge saving for retirement.
“There's a very frustrating statistic out there that consumers spend less time choosing their health plan each year than they spend time choosing a vacation,” Jean Chatzky, CEO of HerMoney, told Yahoo Finance. “It's your job to actually pay attention in open enrollment to see what your employer is teeing up and to see if you can actually find some additional resources to help you during these difficult times.”
What is an HSA?
Tucked into this smorgasbord of offerings is the often overlooked health savings account option, or HSA, which is available for folks enrolled in a high-deductible health care plan. You can also open an account as a self-employed freelancer or business owner if you have a qualified high-deductible health plan (HDHP). The Internal Revenue Service (IRS) sets the parameters for these accounts annually.
With a high-deductible plan, you pay a lower premium per month than other types of plans, but a higher annual deductible — the amount you pay for covered medical costs before insurance kicks in.
The average premiums for covered workers in high-deductible health plans (HDHP) with a savings option this year was $5,363 for family coverage and $1,136 for single coverage, compared with $6,383 and $1,459, respectively, for a preferred provider organization (PPO) plan, according to the new 2022 KFF Health Benefits Survey.
But savings on premiums are offset by a higher deductible. For instance, the average annual deductible for HSA-qualified HDHPs is $2,458 for single coverage, versus $1,763 for PPOs.
You can tap the funds set aside in your HSA to pay medical expenses until you meet the deductible. Most people (56%) use their HSA accounts to pay for today’s out-of-pocket expenses, according to a study by EBRI. Those who can let it ride score retirement funds to help pay for medical bills not covered by Medicare and more.
How it works
Your HSA contribution with your employer can be made through an automatic payroll deduction where the funds are directed from your paycheck, tax-free, into an HSA. You can also add funds directly to your HSA at any time. While these contributions aren't tax-free, they are deductible on your tax return.
Some employers match contributions to HSAs similar to employer-provided retirement savings accounts.
Folks who are responsible for purchasing their own coverage and have a high-deductible plan can shop for an HSA through their health insurance company who may partner with an HSA financial institution. You can also check with your bank to see if they offer an HSA option.
Once you set it up, you can typically contribute to the account until the tax filing deadline.
Putting money in an HSA requires keeping track of what you spend on medical bills and what is eligible for payment from this account. In general, there’s a whopping 20% penalty on any withdrawal amount that is not used toward a qualified medical expense. And that unqualified amount is also subject to regular income tax. For anyone 65 or older, the penalty goes away, but you’ll still pay income tax on items that aren’t eligible. There’s no deadline after the expense is incurred to reimburse yourself.
Who might not benefit from an HSA
While PPOs remain the most common plan type — this year 49% of covered workers are enrolled in a PPO — 29% of workers are covered by a high-deductible plan with a savings option.
If you’re healthy and generally don’t spend a lot on medical bills, an HSA is probably a good option.
“In order to put money into an HSA, you have to be enrolled in a high-deductible health plan, which means if you incur medical expenses, you're on the hook for the first $1,500 if you have individual coverage, depending upon what your deductible is,” Paul Fronstin, director of health benefits research at the Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan organization, told Yahoo Money.
So you don’t end up paying more out of pocket with the higher deductible limits, you’ll want to take an honest evaluation of your likely expenses. If you have major ongoing health care needs or chronic health issues, or anticipate surgery or a major health event, say, pregnancy, you may want to choose a plan with higher premiums, but no HSA.
The HSA tax and retirement incentive
“From a tax perspective, it's the best thing out there,”Fronstin said. “It benefits from a triple tax advantage. It’s the only account that lets somebody put money in on a tax-free basis, lets it build up tax-free, and lets it come out tax-free for qualified healthcare expenses.”
The federal government’s pandemic relief program expanded what HSAs can be tapped to pay for, including nonprescription drugs for pain relief and allergy pills. (The IRS has a full list of eligible items.)
HSAs can also help cover the cost of travel such as an air or train fare or gasoline for essential medical care if you need to travel out of your state for a medical procedure. And even if your spouse or children are not covered under your medical plan, they can also tap your HSA.
Contributions do not need to be used annually, but roll over year after year and are yours to take along when you retire or change employers. One big benefit for retirees is that the HSA can be used for unexpected expenses that Medicare doesn’t pay, such as dental and vision care.
New Medicare enrollees can expect their uncertain medical expenses to take roughly $67,000 out of the household budget, on average, over the rest of their lives, according to a new brief by Karolos Arapakis at the Center for Retirement Research. It excludes their single largest medical expense – monthly insurance premium.
Meantime, HSAs are not subject to required minimum distributions like an IRA or 401(k) that you need to withdraw each year once you hit 72.
“HSAs are like a stealth retirement and tax management strategy disguised as a way to save money on healthcare,” Bobbi Rebell, a certified financial planner and author of “Launching Financial Grownups” told Yahoo Money. “If you can use other money to pay those medical costs, and let the money just chill in the HSA account, when you hit your golden years, the money will have grown tax free. That is potentially decades of tax free growth that can lead to exponential growth of your retirement assets.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon
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