Health savings account: an investment and retirement account?

Many folks understand a health savings account (HSA) is a tax-advantaged 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 qualified, out-of-pocket medical expenses. If used for nonmedical expenses, the distributions are taxable and face a 20 percent penalty. However, many do not understand the investment 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, bonds, mutual funds, etc., depending on the HSA provider and HSA balance. 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. 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 distributed out for non-medical expenses as taxable distributions, similarly to how distributions from a traditional IRA would be treated.

Common scenario: couples seeking additional tax-advantaged retirement/medical savings

A common situation couples in their 40s or 50s find themselves in is having the desire for additional retirement savings and/or additional savings for medical expenses that will be incurred during retirement. If a couple, both age 50, contributed each year the maximum contribution limit to their family HSA, and never invested the funds, the balance after 15 years would be $118,000.* However, if invested with an average annual rate of return of 8 percent, the balance, including earnings, 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.

Pro Planning Tips Q&A

Q: Reimbursing prior-year medical expenses: I’ve had out-of-pocket medical expenses in prior years, but never reimbursed these through my HSA. Can I still receive these reimbursements?

A: Yes, if you had an HSA open during a year that you incurred unreimbursed, out-of-pocket, medical expenses and never used your HSA to refund you for those expenses, you can still refund yourself with your HSA for those prioryear medical expenses. This can be done for any year that the HSA account was open. The HSA reimbursements do not need to be reimbursed in the same year that the out-of-pocket medical expenses were incurred.

Q: Contribution deadline after year-end: It’s past 2021 year-end, and I did not maximize my 2021 HSA contributions. Can I still contribute and deduct my contribution?

A: Yes, you can make contributions for a prior year up until the April 15th filing deadline (similar to IRA contribution deadlines). Don’t miss out!

Q: Maintaining cash reserves and taking the deduction: I had unreimbursed, qualified, medical expenses in 2021. Can I make a 2021 contribution and then immediately take a distribution for these unreimbursed expenses?

A: Yes! This is a great tax planning opportunity. For example, if you incurred $2,000 of unreimbursed, qualified, medical expenses in 2021, you could contribute $2,000 to your HSA as a 2021 contribution and immediately distribute this $2,000 back out as a qualified medical expense reimbursement. (It is important to consider annual contribution limits and deadlines.)

HSAs are under-utilized, especially for investment and retirement purposes. If you have an HSA and would like to take advantage of the taxdeductions, investment opportunities or retirement planning opportunities, reach out to your tax professional, and they can walk you through the options you have.

GARRETT KELLY, CPA
TAX MANAGER
Experience in tax planning, compliance, and prep for high net-worth individuals and a variety of businesses. His other areas of focus include bank taxation, real estate, and flow-through entities.

9 EXECUTIVE PARK DRIVE, SUITE 100
MERRIMACK, NH 03054
(603) 882-1111 • MELANSONCPAS.COM

*2021 Annual Family Plan contribution limit: $7,200, plus an additional $1,000 catch-up contribution once 55 or older