SUPERPOWER 2: YOU DON’T HAVE TO SPEND THE MONEY
Any unspent balances in your HSA can be rolled over from year to year. That’s in contrast to flexible spending accounts , another tax-advantaged way to pay for medical expenses. FSAs require users to spend the money within a certain period or those contributions are forfeited.
FSAs allow you to contribute $2,750 in 2021. Individuals can contribute up to $3,600 to an HSA this year, while families can put in up to $7,200, plus there’s a $1,000 catch-up contribution for people 55 and older.
HSA contributions can be invested — and that means your money can really grow. Even if you have to spend some of the money along the way, the tax-free growth can add up.
SUPERPOWER 3: ANY WITHDRAWAL COULD POTENTIALLY BE TAX-FREE
As mentioned, withdrawals are tax-free if used for qualified medical expenses, including health insurance deductibles and copayments. The IRS maintains a list of eligible expenses ranging from acupuncture to X-rays. You can’t double-dip : Only eligible expenses that haven’t been reimbursed by another source, such as insurance or a flexible spending account, can justify a tax-free withdrawal.
The key thing to know, however, is that the IRS doesn’t require you to incur the expense in the same year you make the withdrawal.
As long as the expense occurred after you opened and funded the HSA, your withdrawal can be tax-free even if it’s years or decades later, says financial planner Kelley Long, a CPA, personal financial specialist and consumer financial education advocate for the American Institute of CPAs. You just need to keep the receipts for the qualifying expenses in case you’re audited by the IRS.
“I call this the shoebox strategy,” Long says. “You’re storing up your receipts because there is no statute of limitations on when you reimburse yourself for eligible expenses.”
You’ll want to guard against fading ink so you can actually read the receipts years later, so Long recommends making digital copies. She takes a picture of her eligible receipts and stores them in folders labeled by the year.
SUPERPOWER 4: YOU CAN JUMP-START YOUR KIDS’ RETIREMENT
Typically, you can’t claim your children as dependents for tax purposes after they’re 19, or 24 if they’re college students. But many kids stay on their parents’ health insurance policies until they’re 26, which gives parents a unique planning opportunity, says Mark Luscombe, a principal analyst for Wolters Kluwer Tax & Accounting.
A child who’s not a dependent for tax purposes, but still on a parent’s high-deductible health insurance, can set up their own individual HSA. The parents can help out by giving the child some or all of the money to fund the account.
The child can’t set up their own HSA if they’re still claimed as a dependent on the parent’s tax return. And once the child is no longer a dependent, the child’s expenses can’t be used for tax-free withdrawals from the parent’s HSA. But this approach gives the child a tax deduction for the contribution and potentially decades of tax-advantaged growth — making it a super strategy for those who can swing it.
