How to Start Investing Your HSA

Opening a health savings account (HSA) is a great step in the right direction for your financial future. Consider an HSA as your home for medical savings. With an HSA, you can put money aside every year to pay for qualified medical expenses in the future. With the long list of eligible medical costs you can use your HSA for, it's a powerful financial tool.

But you can do so much more than simply saving. If you're not considering HSA investment, you're missing out on piles of potential cash.

About HSA Investment

The beauty of an HSA is that it has three tax advantages. The first is that your contributions up to the annual limit are tax-deductible. The second is that qualified withdrawals are tax-free. Finally, the interest you earn through investments is tax-deferred.

Investing is the best way to make your medical expense nest egg grow. You don't need much to get started. Say, for example, that you only put a couple of hundred dollars a month into your HSA, starting at age 30. With investments, that figure can grow to well over a million dollars by the time you're 70 if you earn the stock market's standard annual return of 10 percent.

That figure makes a big difference considering how health expenses get higher as you age. You don't have to withdraw from your HSA at any specific point, so investing can help you maximize savings for long-term financial growth.

There are many ways to invest through HSA. Like a brokerage account or IRA, you need to have money in your account first. Once it's funded, you can choose what types of investments you want to make. Many providers offer simple tools and automatic rebalancing, making investment approachable even with little financial experience.

Typically, the best way to invest is with stocks, bonds, mutual funds, ETFs, etc. It's a hands-off process that can earn you substantial interest over time. Because you don't pay taxes on those gains, you can sit back and watch your HSA grow over decades.

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What is a Tax Deduction?

When filing your taxes, deductions are a way to reduce your taxable income. Sometimes called "write-offs," deductions typically come from expenses. Using tax deductions to your advantage can lower how much you owe, making it easier to navigate tax season.

But how do they work, and is an HSA tax deductible?

Standard vs. Itemized Deductions

There are a couple of ways to claim tax deductions. The most common is the standard deduction. This method applies to most people, and its figure varies every year. The standard deduction for the 2023 tax year is $13,850 for individual filers, $20,800 for heads of households and $27,700 for couples filing jointly.

Another option is to make itemized deductions. As the name implies, this route requires you to provide specific dollar amounts of eligible deductions. Choosing itemized deductions makes sense if your total surpasses the limits for standard deductions.

It's more difficult to claim itemized deductions. You must report fixed amounts on the Schedule A of Form 1040 or 1040-SR.

What Can I Claim as a Deduction?

There are many possible deductions available. You don't have to worry about individual items if you choose the standard deduction. But for itemized deductions, you must report accurate figures. Some options have limits, so it's wise to work with a tax professional if you have several deductions you want to claim.

The most common deductions include up to $2,500 in student loan interest, up to $750,000 of mortgage interest on secured home mortgage debt and up to $10,000 on state taxes.

Is an HSA Tax Deductible?

You can deduct contributions if you have a health savings account (HSA). You can claim up to the annual contribution limits as a deduction. For 2023, that's $3,850 for self-only coverage and $7,750 for family coverage.

That's not all. Taxpayers may qualify for deductions if they have substantial medical or dental expenses. You can claim up to 7.5 percent of your adjusted gross income.

Individual retirement accounts (IRAs), 401(k) plans and other qualifying retirement plans all come with tax-deductible contributions as well.

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Can I Buy Face Wash With My HSA?

A health savings account (HSA) is a special savings account that allows you and designated representatives to contribute tax-free money that can be used for healthcare-related expenses. Most people have access to an HSA account through an employer as a workplace benefit. Additionally, contributions to an HSA account are often made directly through paycheck deductions, but employers also contribute a set amount or match a percentage of an employee’s contributions each month, quarter or year.

What Can HSA Funds Be Used For?

HSA funds must be used to make healthcare purchases, but not every purchase that falls under the healthcare category is covered. For the most part, basic medical care costs like doctor visits, prescription medications, and medical procedures can be paid for using HSA funds.

In some cases, there may be a question about whether something qualifies for HSA fund eligibility. In these cases, you can always consult with your account manager or your human resources department representative. These people should be able to provide you with plan details that lay out what is covered and what is not covered.

Purchasing Face Wash With HSA Funds

Although HSA funds are often used for expensive medical care, they can also be used for some over-the-counter healthcare products, including medicated face wash. Face wash is considered a healthcare product under HSA guidelines for most people, but you may need to have a qualifying medical condition to prove that the expense is medical and not merely for cosmetic purposes. You won’t need to prove this when making a purchase of face wash with HSA funds, but you may need to prove it if your purchase is audited and rejected.

How Do You Spend HSA Funds?

Most HSA accounts will come with a credit or debit card that is connected to the user’s account. When you make a healthcare purchase, you simply use your HSA card like a normal credit or debit card.

In most cases, there will not be a personal identification number (PIN) associated with your card, so you may need to run the card as a credit card for it to process properly. Keep in mind that purchases may be audited, so if you purchase a non-covered item using HSA funds, you could be issued a penalty and be required to pay back the money that was spent.

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How Has Inflation Impacted Healthcare?

Inflation is a challenge in 2022, and it looks like inflation may continue to be an issue into and through 2023. Healthcare is an industry that sometimes doesn’t feel inflation as much as others, but have things changed this time around? If so, how much has inflation impacted healthcare, and are there ways to save on healthcare inflation?

Why Inflation Doesn’t Always Directly Impact Healthcare

Inflation often bypasses producing a direct hit on healthcare for two reasons. First, healthcare is something everyone needs at some point, and second, healthcare costs and insurance agreements are usually fixed in place years in advance. The difference in 2022, however, is that, as demonstrated by the Covid-19 pandemic, the public has become accustomed to limited healthcare options.

Also, despite planning, costs of other goods and services are going up, meaning costs for everything related to providing healthcare are going up. While services themselves may not cost more to provide, the cost of a new imaging machine delivery or new office supplies has probably risen.

Paying Employees

Another consideration is that there are inflation forces at play when it comes to wages for healthcare workers. Although many doctors have fixed agreements with large healthcare providers, office staff, nursing staff, janitorial staff and other people working in healthcare facilities have seen their costs increase.

At the same time, due to inflation, wages being offered by other industries are also exploding. This can lead to stiffer competition for healthcare employers who need to retain top talent, meaning the need to pay out greater compensation could be a factor.

Cutting Costs to Fight Inflation

One way to save on healthcare inflation is to look for ways to reduce costs. These reductions can be difficult to make in healthcare, as virtually every expense has an important purpose. Although you would never want to compromise on life-saving technologies and medicines, your facility may consider looking for ways to reduce everyday bills.

Likewise, you can reduce the impact of inflation by examining various metrics at your workplace to see where costs are high. If you don’t take the time to engage in analytics, you may miss opportunities to reduce spending, so break out the spreadsheets and start looking over your datasets.

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Why It's Important to Be an Educated Consumer on the Healthcare System

The healthcare system is notoriously confusing to those who aren't familiar with medical procedures and terminology. In most cases, patients will accept provider recommendations without considering other options or asking relevant questions. With the high cost of healthcare, being a passive patient isn't the best approach. Here's why you should take steps to become a more educated consumer and take steps to be in control of your care.

Potential Cost Savings

The most challenging part of navigating the health care system is the costs. While your overall health and well-being should be the most significant factor for any healthcare decision, money will factor in at some point.

Providers typically don't think about the financial implications of treatment. Their goal is to help you get healthy, so costs are not a part of the equation for most recommendations. Instead of blindly accepting the first recommendations you hear, research to understand costs and how procedures will affect you financially. You may find a more affordable option that helps you steer clear of medical debt.

Mitigating Risks

Another thing to think about is the risks of treatment. Patients often focus too much on the benefits without weighing the potential risks. Here's where being an educated consumer makes a difference.

For example, say that you have the option of treatment A and treatment B. While treatment A might have a slight edge over the other option, it also comes with more extreme risks. Is that a wager you're willing to make for a negligible chance of better results?

Knowing What to Expect

Sometimes, treatment plans can provide excellent results. But in other cases, you might not get the results you expect. Not every procedure will eliminate issues or alleviate pain. They may even cause additional complications to arise.

As an educated consumer, you can weigh your options more realistically by understanding what to expect. It's about being realistic and managing your expectations without making assumptions based on quick provider recommendations.

Considering Alternatives

Finally, navigating the health care system involves learning about alternatives. Don't be afraid to get second opinions or explore other options. Let's look at back surgery as an example.

While back surgery is a viable option, it doesn't always provide outstanding results. There are many risks involved. As a passive patient, you might take those risks without considering options like physical therapy. Therapy takes longer to see results, but it has fewer risks, lower costs, and comparable outcomes.

Healthcare is not something you should treat passively. It's a big part of your life that impacts your well-being and financial health. Do your due diligence, ask questions, and consider all possible options.

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Consequences for Not Following the IRS 2022 Retirement Account Contributions Limits

An individual retirement account (IRA) is a strategic way to manage your money and prepare for the future. Traditional and Roth IRAs help you save up for retirement and grow a nice nest egg. However, contributing to retirement accounts can be tricky.

These tax-advantaged accounts have strict limitations and putting more money into the account than you are allowed to could lead to some penalties.

2022 Contribution Limits for Retirement Savings Account

Understanding contribution limits is paramount. Limits can change year after year, so you must stay on top of current allowances to avoid issues.

In 2022, the most you can contribute to a Roth and traditional IRA is $6,000. The only exception is if you're over 50 years old. In that case, you can contribute up to $7,000.

Those figures reflect the combined total you can put into these accounts. That means individuals with both Roth and traditional IRAs must split the difference between the accounts.

There are additional limitations to be wary of when planning contributions. For Roth IRA, you can only contribute if you make under an adjusted gross income threshold. Making contributions when you made more than that threshold is an excess contribution.

The Penalties for Excess Contributions

Anything more than the stated limits is an excess contribution. So, what happens when you go above the 2022 contribution limits for retirement savings account?

All ineligible contributions are subject to a six percent penalty. You'll have to pay six percent on anything above the annual limit. Typically, you pay the penalty when you file income taxes.

It's important to address the issue as quickly as possible. The penalty applies every year the extra contributions remain in your account.

There are a few ways to deal with the extra funds. You can withdraw it, apply it to next year, or file an amended tax return. Remember that an additional 10 percent penalty will apply if you can't remove the excess as a qualified distribution.

The penalties for not following contribution limits can be steep. If you notice issues, fix them as soon as possible to minimize unnecessary fees.

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Who Can Use My FSA?

Most people these days are looking for ways to save money on healthcare. After all, medical costs have done nothing but go up in recent decades, and many are feeling the squeeze, especially without insurance. Even with insurance, costs can still put a burden on your wallet. Many insurance plans have high deductibles to offset low premiums, and this means that you have to spend a lot out of your own pocket before your insurance benefits kick in.

Flex Spending Accounts May Help

One way that people are combating the rising cost of healthcare is with flexible spending accounts. A flexible spending account definition states that this is an account that is set aside specifically for healthcare expenses. Money placed into a flexible spending account is not taxed until it is spent, if at all, and funds can be used to pay for things like doctor visits and prescription medications.

The downside is that, according to most flexible spending account definition terms, funds that are not used at the end of the year are lost. Unlike a health savings account (HSA), flexible spending account funds do not roll over into the next benefit period.

Sharing Flexible Spending Account Funds

If you have a flexible spending account, you’ll be happy to know that it is possible to share your funds with certain other people. You can use a flexible spending account to pay for medical expenses for a spouse or dependents. These individuals do not have to contribute to your account, nor do they have to be associated with the account provider, such as an employer.

Spending is still regulated by the same rules, however, meaning purchases made using flexible spending account funds are limited to qualifying medical costs. Family members can, however, contribute to a flexible spending account if they choose, meaning you could use your account as a family healthcare account where each person contributes a portion each month. To set this up, you will want to speak with your account provider. Once again, this is usually an employer that sponsors the plan.

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