HSA Characteristics
An HSA account reduces your medical costs by allowing you to save for and pay medical expenses with pre tax dollars. This slide portrays what’s known as the Triple Tax Advantage of an HSA account.
Contributions are tax deductible
Funds grow tax deferred
Distributions made to pay qualified medical expenses are tax exempt
Some individuals even experience a 4th benefit, because qualified benefits offered under a cafeteria or Section 125 plan are exempt from FICA. So if your HSA is part of a cafeteria plan, you will save an additional 7.65%
Modeling HSA use in the planner
Strategy 1: Delayed HSA Reimbursement for Current Healthcare Spending — Best for Wealth Building and Tax Efficiency
Your HSA can be invested like a retirement account, growing tax-free for decades. You can save receipts and reimburse yourself anytime later, as long as you save receipts from qualified expenses. This strategy may be useful to manage tax brackets.
To account for future reimbursements:
Step 1: navigate to the Money Flows section of the planner
Step 2: add a Transfer from the HSA account to the after-tax account that is prioritized in your withdrawal order. This account has priority for funding expenses in the Planner and this is the best way to represent the HSA funds being added to your cashflow.
NOTE: you may reimburse yourself for qualified medical expenses that
were incurred after establishment
were paid out of pocket
were not reimbursed from another source or included as itemized deductions on your tax return
Strategy 2: Spend from HSA Now — Best for Cash Flow Support
If you are currently utilizing HSA funds for medical expenses, simply track the HSA account balance.
To account for utilizing HSA funds for medical expenses in the future:
Step 1: navigate to the Money Flows section of the planner
Step 2: add a Transfer from the HSA account to the after-tax account that is prioritized in your withdrawal order. This account has priority for funding expenses in the Planner and this is the best way to represent the HSA funds being spent on healthcare.
Estate Planning with HSA accounts
The Planner will place your HSA account last in the withdrawal strategy, which may not be optimal because inheritance treatment of a Health Savings Account (HSA) depends on the relationship of the beneficiary to the account holder.
If your spouse is the designated beneficiary, the HSA transfers to them tax-free, becomes their HSA, and they can continue using it for qualified medical expenses. This is the most favorable outcome for tax purposes.
If a non-spouse (like a child, sibling, or other heir) is the beneficiary, the HSA ceases to be an HSA upon your death and the entire balance becomes taxable income to the beneficiary in the year of your death.
However, any qualified medical expenses the decedent incurred prior to death can be paid from the HSA by the HSA beneficiary within one year of your death — to reduce the amount that becomes taxable income to the non-spouse beneficiary.