2020 Guide to Using an HSA for Savings, Tax Breaks, and More

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Hey, everyone, and welcome to the money girl podcast. I’m Laura Adams. I’m an author, speaker, and consumer advocate. And I’ve been writing and hosting this show since 2008. If you’re a new listener just tuning in for the first time, I am really glad you’re here. And if you’re longtime are welcome back and thank you for being a part of this amazing community.

You guys send me really great questions and while I can’t answer all of them personally or cover all of them on the show. I do cover the ones that are popular or the ones that I think can help the most people. And since staying healthy is so important right now, I have been getting a lot of questions about HS HS or health savings accounts.

And let me tell you, if you’re not familiar with these accounts, you need to get up to speed on how they work because they can cut your medical costs big time, and that means saving money. But like most types of tax-advantaged government-sponsored accounts, they come with rules, and you got to follow those to qualify for all of the tax-saving goodness. And the rules can definitely seem confusing at first. But I promise that once you understand a few basic concepts, they’re really not that difficult to master.

And I do think that hearing answers to other people’s questions about financial issues and accounts is incredibly valuable. So I’m going to kick off the show with a question from Jennifer.

She says, Hi, Laura, first off, thank you for your podcast. It’s been very helpful as a young professional trying to make the most of my finances. I have an HSA from a job I had four or five years after graduate school with over $1,000 left in it. I’m healthy and rarely used it and I even stopped contributing once it reached 30 $500. Then I moved several times and had two job changes. Now I have another HSA at my new job, and I already have a $1,000 balance in that account.

Should I transfer the money from my old HSA to my new one, and stop contributing once I max out the annual limit? Or should I take the tax hit on the old HSA and withdraw the balance and use it to pay down a credit card with a $7,000 balance?

So let’s cover Jennifer’s question. Right off the top here, Jennifer, definitely keep your HSA money growing, I do recommend that you transfer the old account into the new account, you want to contact that account and just ask them to do a tax-free transfer for you. They may have some special instructions that would allow you to do that. But you want to make sure that it is not considered a taxable event. So contact that account, it should be pretty simple to do.

If you take out the money from the account and spend it, you’re going to be hit with some serious penalties, you’re going to pay taxes plus a 20% withdrawal penalty. That’s a huge amount of tax, you do not want to pay that. So keep that money growing tax-free. There’s nothing wrong with keeping the separate accounts and just spending down those accounts one day when you need them. But I do think that consolidating them will make the recordkeeping a little bit easier.

So, Jennifer, I hope that helps keep it growing tax-free. And in this podcast, we’re going to talk about why HSA is so powerful, and how they help you to save money. So let’s get into more of the details here. Let’s just review what is an HSA? For those of you who are not familiar, an HSA is a tax-exempt account for the sole purpose of paying allowable medical expenses. It’s one of my very favorite tax-advantaged accounts because not only does it allow you to pay less tax for a wide variety of allowable medical expenses, but you can spend the balance any way you like in retirement. You can even spend it in retirement for nonmedical expenses, and I’m going to explain more about that in a moment. But when you get to pay for medical expenses tax-free, that is a huge saving. Let’s say you’re paying 20 to 25.

Some of you are paying 30 35%. In average taxes, if you get to pay for something tax-free, you’re saving 2030 35% on that purchase, just because you didn’t have to pay tax on the money that you’re spending on those medical products or services. So it is a legal way to pay less tax and save more for the future. So I’m going to review I’m going to kind of keep coming back to these tax advantages to making it crystal clear for you. But first, you have to know that in order to qualify for an HSA, you’ve got to have a particular type of health insurance, and we’ll talk about that and I wish everybody could get an HSA but maybe that’ll change down the road. But right now, you have to have something called a high deductible health plan. When you have this plan that you either buy on your own as an individual or that you get through work, you can contribute to an HSA.

And once you’ve got an HSA, you always own it, you always manage it as an individual. And there are no income limits to qualify. And just like Jennifer, you know, if you leave a job that opened up an HSA for you, it’s portable, you can take that money with you, you can, you know, do whatever you want with it, it is yours. You don’t need permission from an employer or the IRS to set up an HSA or to move an HSA. It stays with you, even if you change jobs, or you become unemployed. And even if you become uninsured, if you lose your insurance, you can continue spending what’s in the HSA. Now, you can’t make any new contributions to the account if you are not insured with a high deductible health plan, but you can still spend that balance in the account. The beauty of an HSA is that contributions are deductible on your tax return.

Even if you don’t itemize deductions, the funds can earn interest or they can even be invested. If you want to get some potential growth in the account. That’s what I do. I typically keep a couple of thousand dollars cash in the account and the balance, I sweep over into investments so they can grow more aggressively, and you typically have a menu of available options. They’re typically mutual funds or exchange-traded funds. And then when you take distributions to pay for your qualified medical expenses, those original contributions plus earnings in the account, either interest earnings or investment earnings are entirely tax-free. That is amazing.

The contributions in an HSA can come from you from someone else, like a family member, or even an employer. Some companies do offer benefits that include regular deposits into an HSA like, you know, $150 a quarter. And it’s just like with matching funds for a retirement plan. HSA contributions from an employer are not included in your taxable income.

So that is an amazing, fantastic benefit. And depending on your income tax rate, using an HSA to pay for allowable medical expenses, as I mentioned means getting about a 20% 30% discount. It just depends on your tax bracket how much you earn and what your tax rate is, over your lifetime, that can add up to massive massive savings. Now, similar to a retirement account, you should never put money into an HSA that you might need for everyday expenses because you can only use those funds to pay for current or future qualified unreimbursed medical expenses. If you take in eligible distributions, you have to pay income tax plus an additional 20% penalty on withdrawn amounts, which is why I recommend that Jennifer not do that.

So a lot of people will ask well, Laura, what’s the difference between an HSA and FSA this is another popular savings account. That’s a flexible spending arrangement. Now, these are very different because an FSA can only be offered by an employer. And it has to be funded through payroll deductions on a pre-tax basis, kind of like you do with a 401k contribution. And an FSA comes with an annual use it or lose it policy. That means you’ve got to spend it all with an HSA, there is no deadline to spend your balance funds can stay in the account indefinitely. They just roll over from year to year. Even if you change your insurance company, you become uninsured or you’re unemployed. So don’t confuse these two accounts. Individuals can open an HSA and it permits tax-deductible contributions with no spending deadline. An FSA can only be offered in the workplace and you have to spend all our most of your balance every calendar year.

So I mentioned that you need a special type of health insurance to qualify for an HSA called a high deductible health plan. And if you’re not familiar with a deductible, that’s the amount that you have to pay for your covered medical expenses before your benefits begin each year. And while you might think that it’s better to have a low deductible, and pay less out of pocket, what that means is that you typically have higher monthly premiums, deductibles, and premiums work like a seesaw because increasing one makes the other one go down. So when you have a higher deductible, your premiums go down, making policy more affordable on an annual basis, and more employers are offering these high deductible health plans to help workers keep their premiums as low as possible. No matter if you get health insurance on your own or through work. You want to find out if it is an HSA qualified plan.

So you can get an HSA and get all the medical savings possible. But I do want to note that a high deductible health plan is not the right choice for everyone. It really depends on your health situation. They work the best if you’re in relatively good health, and you’re not likely to have to spend that full deductible each year.

All right, so how much can you contribute? Well, for 2020, you can contribute up to $3,550 to an HSA when you have insurance for just yourself, or you can do twice that amount 7100 a year when you have a family plan. Now, if you’re over age 55, you can contribute some additional amounts, you can contribute an additional thousand dollars to either that individual or that family plan. What’s also great about an HSA is that you can make your contributions anytime during the year you could make it weekly, monthly or just one time. You can even make it up to April 15.

For the previous tax year, just like you can with like an IRA, but you’re never required to make contributions to an HSA, you can make contributions one year and then the next year decides, you know, you’ve got plenty in there and you don’t want to make contributions. And to help you get a handle on these rules, I created a one-page cheat sheet that you can download for free. It is just a really handy tool that covers all of the main things you need to know about HSA is and it’s updated for 2020. To get the free PDF, all you have to do is text, me text HSA tool again, HSA tool, all one word, or one phrase to the number 33444. Again, the HSA tool to the number 33444.

All right, so I mentioned that you can use an HSA in retirement. This is a really neat feature of the account, and it’s an often forgotten benefit that after age 65 you can spend HSA funds on nonmedical expenses without having to pay that huge 20% penalty. Now you still have to pay income tax on the amounts that you take out. But you do not have to pay the penalty. And so that means that an HSA turns into something that looks more like a traditional retirement account. Once you hit that age 65 and you become eligible for it.

That’s a really great reason to max it out every year, even if you don’t expect many medical expenses. I’m like, Jennifer, I’m pretty healthy. I don’t really have a lot of medical expenses, but I maxed out my HSA every single year because I know that it’s basically for me just additional retirement savings. It’s like an add on to my retirement accounts. So I would encourage you to do the same if you know, definitely if you can afford to max it out and you don’t need those funds for everyday living expenses. Think of it as kind of a booster to your retirement account.

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Let’s talk about what are the allowable expenses? What can you spend those HSA funds on? Well, you might be surprised at the list. I mean, it is a massive wide variety of medical expenses, dental expenses, vision, hearing, I mean, really, just about anything that you can think of is qualified. So once you’ve opened the account, and you’ve got a little money in there, you need to understand how to spend it.

So you want to think about using it for medical costs that you might incur until you meet your annual deductible. Remember, you’ve got to have a high deductible health plan. So until you meet that deductible, a lot of your expenses will not be covered. So until that is covered, you want to pull it from your HSA, and also there are a lot of things you can spend with your HSA that are not covered by your insurance at all.

So, you know, you can really use it for a wide variety. The IRS says that for an expense to be HSA qualified, it must pay for health care services, equipment, or medications. And there are a lot of expenses that you might not expect. And I’m going to cover 10 of them in a moment.

Now, the new cares Act, the Coronavirus Act that was enacted this year in March, it expands eligible expenses. And you can now use your HSA for some different and new types of products and services. One of them is really interesting. It’s feminine hygiene products, tampons, sanitary napkins, menstrual cups, all of those feminine products. You could not use an HSA for previously. Now you can and you know that can add up to a lot of savings.

You can also use your HSA for over the counter medications previously you had to have a prescription. So now over the counter medication patients Like flu and cold medicine pain relievers, sleep aids, eyedrops remedies for indigestion, acne, motion sickness, I mean just about anything you can think of over the counter.

You can now use your HSA for the cares act also allows you to use your HSA for telehealth services. Now, this does have a deadline you can only use it through the end of 2021 for telehealth services unless that gets extended.

So if you want to see a doctor have a consultation, you know anything Coronavirus, related or not Coronavirus related via telehealth you can use your HSA for which is amazing. I’m just scratching the surface here there are hundreds of potential HSA qualified expenses.

The full list is in IRS Publication 502 medical and dental expenses. I’ll put a link to it in the notes for the show which is in the money girl section at quickanddirtytips.com, but I’m going to review 10 qualified expenses that may surprise you. Number one, prescription sunglasses.

This is one of my favorite ways to use an HSA. Paying for an annual eye exam and new prescription sunglasses is just a great way to use them. Of course, regular prescription eyeglasses and contact lenses are also qualified expenses. Number two eye surgery any cost you might have to pay out of pocket for surgery to correct your vision, such as LASIK or the removal of cataracts can be paid for using HSA funds.

And if your sight or hearing is impaired, you can also use it to purchase and care for a guide dog or other service animal. Number three dental care going to the dentist is also covered for routine cleanings to the prevention of dental disease. You can use your HSA for fluoride treatments x rays, fillings, extractions, dentures, and braces. Teeth Whitening is not a qualified expense nor is any treatment. That’s purely cosmetic number four chiropractic.

All chiropractic care is HSA qualified, even if your insurance plan doesn’t cover it, don’t hesitate to seek it as an alternative for pain relief before you go for medication or surgery. Number five, acupuncture this one surprises a lot of people. Even if your health insurance does not cover acupuncture, you could use your HSA to pay for it tax-free. Number six fertility enhancement. You can use an HSA to pay for any treatment to overcome an inability to have children such as in vitro fertilization. And once you’re a parent you can also spend it on breast pumps and supplies that assist lactation or you can use an HSA to go in the opposite direction and pay for birth control sterilization or legal abortion.

Number seven, drug and alcohol addiction treatment, any amount that you pay for yourself or a family member to have inpatient treatment at a Drug Rehab Center, including meals and lodging is HSA qualified, you can also pay for transportation to and from Alcoholics Anonymous meetings in your community.

Number eight care from a psychologist or a psychiatrist. cost to support yourself or a family member through the treatment of a mental condition or illness is HSA qualified, you can use the funds to pay for a patient’s treatment at a Health Institute if it’s prescribed by a physician to alleviate a physical or mental disability or illness. Number nine home improvements.

Any special equipment or improvements installed in a home to care for you or your family members can be paid for with an HSA if the purpose is medical care. These might include constructing entrance ramps, widening doorways, installing lifts, or lowering cabinets and saints. Another capital expense that’s HSA qualified in removing lead-based paint in a home.

That you own or rent and number 10 transportation and travel, the cost to get to and from any type of medical care whether you’re taking a bus, taxi, train, plane, or ambulance can be paid for with HSA money. This rule includes making regular visits to see an ill family member if visits are recommended as part of the treatment.

You can include lodging but not meals when you travel to another city for medical purposes. And if you’re using your own vehicle to get to medical services, you can include your out of pocket costs, like gas, oil, tolls, and parking fees. As HSA qualified, however, you can’t cover general vehicle maintenance or insurance costs. So those are some great ways to use an HSA. And before we wrap up, I want to review the tax benefits of using an HSA just so you’re really clear. If you’re eligible to contribute to an HSA, your contributions are tax-deductible.

Double up to your annual limit. And while your money is in an HSA, it grows tax-deferred, you do not have to pay annual taxes on interest income or investment earnings in the account. And your withdrawals from an HSA that are used for qualified healthcare expenses are entirely tax-free. You do not pay tax on those contributions or any investment or interest growth in the account, which is amazing.

Okay, I promised that we’d cover seven benefits of an HSA. So let me sum up by giving you seven significant benefits. Number one contributions are tax-deductible up to the annual legal limit, which reduces your taxable income. Number two funds remain in the account from year to year for your entire life with no penalty if you don’t spend them. Number three withdrawals are never taxed if you spend them on qualified medical expenses. Number four, your balance grows tax-free when you have interest earnings or investment gains if you spend them on qualified medical expenses.

Number five funds can be used for you, your family, or your dependents for qualified out of pocket medical expenses. Number six, you own the account and decide how much to save or spend each year. an HSA is portable. So if you’re like Jennifer, and you change employers, even switching health plans, or even becoming unemployed, that account is yours to keep and spend.

Number seven, you can fund an HSA for the first time using the money you’ve already saved in an IRA by doing a tax-free rollover from your IRA into your HSA. And you can do that one time in your life up to the annual contribution limit. And that’s actually how I started my HSA many, many years ago by doing that rollover from my IRA, if you qualify for an HSA, it’s really easy to open one.

They’re available at banks, credit unions, brokerages, and a lot of specialty institutions, and most are really convenient to use. They’ll offer paper checks and debit cards, online banking, kind of like a regular checking account. And again, I would encourage you to review my HSA cheat sheet. Not only does it have all the rules, but it does give you some of the best places to open up your HSA again, all you have to do is text the phrase HSA tool with no space to the number 33444. Thanks again to Jennifer for sending in her question.

If you have a question or a dilemma, I’d love to hear from you. I will say a great way to keep the money conversation going is to join my private Facebook group called dominate your dollars. It’s a fantastic group of people that are helping each other to request your invitation you can visit to dominate your dollars on Facebook or you can send me a text message for immediate access text the word dollars do Ll RS to that same number 33444.

I hope to see you in the group. And you can also visit Laura d adams.com. to email me a question. You can even record a voicemail. We’ve got a terrific line at 302-364-0308. We set it up just for you so you can leave your message and it’s a great way to get your question featured on the show. That’s all for now. I’ll talk to you next week. Until then, here’s to living a richer life. Money girl is produced by the audio wizard Steve Rosenberg with editorial support from Karen Hertzberg.

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