Your Money, Your Independence Open Enrollment: Benefits to Opt-In for your HSA
For many, fall brings Open Enrollment to work benefits. The once-a-year opportunity to make changes without needing a life event.
Beyond insurance and retirement benefits, these elections help maximize your tax planning for 2022. Yet, people spend more time scrolling Instagram than reviewing offered electives.
What are HSAs?
Health Savings Accounts or HSAs are tax-exempt savings plans paired with a high-deductible health plan (HDHP) meeting certain criteria (i.e. $2,800 family deductible).
HSA is not “Use It or Lose It” like FSA annual benefits and upon leaving a company or retirement, you maintain your HSA.
How do you participate?
Only during an Open Enrollment can you Opt-In to an HSA by choosing a $ amount to contribute. You can change $ amount throughout the year, but not the ability to Opt-In.
Key HSA facts:
• In 2022, an individual can contribute $3650 and a family up to $7,300.
• If over 55, contribute an additional $1,000.
• All contributions are tax-free - federal, state, and FICA (Social Security and Medicare).
• No federal taxes on HSA funds spent on qualified health care expenses.
• Excess HSA funds can be invested for tax-free growth to compound for years.
Thus, unlike any other tax-advantaged savings plan, HSA can offer “triple tax benefits”: tax-free contributions, tax-free earnings, and tax-free distributions.
Free money. Really.
Shockingly, over 50% of eligible Americans decline to participate in an HSA. Unbelievable considering most employers put $500-$1,500 each year into an HSA. In theory, $1 per pay period could return $500-$1500 per year from your employer - take it!
Furthermore, “health rewards” programs can earn deposits into HSA by doing preventative care activities. For example, seen $400 deposited into an HSA when each spouse had an annual physical.
Get the tax savings.
Consider a family in 24% tax bracket averaging $4,000 in out-of-pocket medical expenses. HSA tax-free contributions would provide them tax savings of $1,466 ($960 federal 24% + $200 state MA 5% + $306 FICA 7.65%). Earners in 32% bracket can max out 2022 contributions and gain tax savings of $3,259.
Leverage tax-free growth for retirement.
Gaining momentum is a financial planning strategy of avoiding withdrawals from HSAs and pay medical expenses from free cash flow. The allows for investment (funds, ETFs, equities) of HSA contributions to grow tax-free for years before using in retirement for eligible expenses like Medicare premiums, vision, dental, hearing aids, nursing services, long-term care premiums, and medical expenses.
Alert for the Retire Early crowd, while HSAs cannot be used to pay private health insurance premiums, they can pay for health care coverage purchased through an employer-sponsored plan under COBRA, which may be a desired option leaving a company and maintaining until reaching Medicare eligibility.
Learn more by connecting with your benefits coordinator or Certified Financial Planner.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.