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Articles From Lumsden McCormick

Enhance Your Wealth with a Health Savings Account (HSA)

For discerning individuals seeking to optimize their financial strategies, a Health Savings Account (HSA) presents a compelling opportunity to reduce both healthcare costs and federal tax liabilities. As savvy investors, it’s prudent to leverage every available tax advantage, making an HSA a valuable addition to your wealth-building arsenal if you meet the eligibility criteria.

Beyond its primary function of covering healthcare expenses, an HSA can serve as a robust complement to your existing retirement savings plans, offering significant estate planning benefits as well.

HSAs: A Closer Look

An HSA operates similarly to traditional IRAs and 401(k) plans, functioning as a tax-advantaged savings account funded with pre-tax dollars. Withdrawals from an HSA are tax-free when used for qualified medical expenses. However, withdrawals for non-qualified expenses are taxable and, if you’re under 65, incur an additional penalty.

Eligibility for an HSA requires enrollment in a high-deductible health plan (HDHP). For 2024, an HDHP is defined by a minimum deductible of $1,600 ($3,200 for family coverage) and maximum out-of-pocket expenses of $8,050 ($16,100 for family coverage).

To contribute to an HSA, you must not be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). The annual contribution limit for 2024 is $4,150 for individuals with self-only coverage and $8,300 for those with family coverage. If you’re 55 or older, you can make an additional annual contribution of $1,000. While individuals typically make these contributions, many employers also contribute to their employees' accounts.

Cost-Saving Advantages

HSAs offer dual benefits for reducing healthcare costs: lower insurance premiums associated with HDHPs and the ability to pay for qualified expenses using pre-tax dollars. Additionally, unused HSA funds can be carried over from year to year and invested, growing tax-deferred indefinitely. This feature stands in contrast to healthcare Flexible Spending Accounts (FSAs), which often require funds to be spent within the year (although some employers allow up to $500 to be carried over annually). At age 65, you can withdraw HSA funds penalty-free for any purpose, though non-medical withdrawals are taxable.

Unused HSA funds for medical expenses function similarly to an IRA or 401(k), contributing to long-term financial growth.

Estate Planning Considerations

HSAs provide unique estate planning benefits compared to traditional IRAs and 401(k) plans. There are no required minimum distributions (RMDs) at age 73, allowing the account balance to grow tax-deferred indefinitely, thus enhancing your estate. However, the tax implications for beneficiaries vary:

- Spousal Beneficiary: If your spouse is the designated beneficiary, the HSA is treated as their own. This allows them to continue growing the account and make tax-free withdrawals for their qualified medical expenses.
- Non-Spousal Beneficiary: For a child or any non-spouse beneficiary, the HSA terminates, and the beneficiary is taxed on the account’s fair market value. Designating your estate as the beneficiary is usually less advantageous, though a non-spouse beneficiary can use HSA funds to pay for your qualified medical expenses incurred before death within one year after your passing, avoiding taxes on these amounts.

To navigate the complexities and maximize the benefits of HSAs within your financial strategy, contact us for expert guidance and personalized advice.

Enhance Your Wealth with a Health Savings Account (HSA)

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Bob is an experienced tax professional who devotes his professional time to structuring tax strategies in the areas of compliance, consulting, and planning. Bob works closely with a broad range of high-net-worth individuals and multi-generational families, specializing in the areas of gift and estate planning, charitable gift planning, trust and estate administration, individual taxation, and wealth preservation. Bob serves as a practice leader in the Family Wealth and Estate Planning group. Bob joined Lumsden McCormick in 2008 and was named partner in 2022.

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