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Health Savings Accounts: Tax Free Money for Medical Expenses

Learn how a self-directed Health Savings Account can be invested in alternative assets to help you save for future medical expenses.

Posted on October 6, 2023


With medical costs skyrocketing, many people are looking for ways to reduce the amount they have to spend across the board. One tool some investors are turning towards for their medical expenses is the Health Savings Account or HSA.

A Health Savings Account is a useful investment vehicle that can be used to save for medical expenses and reduce your taxable income. At Quest, Health Savings Accounts can be self-directed to invest in a wide variety of alternative investments that can grow the account, and then be used to take qualified distributions tax-free. However, you must meet the qualifications to open an HSA.

How Do I Qualify to Open an HSA?

In order to qualify for an HSA, you must meet all four of the following qualifications:

  • You are enrolled in a high-deductible health plan (HDHP).
  • You have no other health care coverage except what is permitted under “Other Coverage” on IRS Publication 969.
  • You're not enrolled in Medicare.
  • You're not claimed as a dependent on anyone's tax return.

Since these plans are re-defined each year by the IRS, the minimum annual deductible and the maximum amount of out-of-pocket medical expenses is always being re-determined. Visiting can provide some of the current amounts, but it is very important to look for plans specifically listed as “HSA-compatible.” Some employers that offer high-deductible health plans also offer HSAs, but if not, opening a separate HSA account (as long as you have a qualifying plan) is always possible.

However, having a high-deductible health plan may not be a good option for some people who have significant medical expenses. Discussing your options with a tax advisor can help determine if an HSA is beneficial for your situation.

Why Would I Want a Self-Directed HSA?

The HSA is called “The Best of Both Worlds” because when you contribute to an HSA, those funds are either tax-deductible (if you opened your own account) or pre-tax through payroll deductions (if through an employer). The account grows tax free. Then, when you take a distribution for an eligible health expense, once again there are no taxes on those withdrawals.

Contributions to Health Savings Accounts do not add to your tax burden, but actually reduce your taxable income, and that is a great tax advantage! Plus, the ability to invest in alternative assets like real estate, promissory notes, and private placements is another great advantage.

Being able to take tax-free distributions for qualified health expenses is arguably the biggest reason why most people chose to open a self-directed HSA. Other reasons such as flexibility and additional tax advantages are also positive attributes to consider when thinking about a Health Savings Account.

Unlike a Flexible Spending Account, HSA unused funds roll over every year, so you never have to worry about losing your savings at the end of the year. Even if you can no longer contribute to an HSA (once you turn 65 or become enrolled in Medicare), you can always continue to use the money for out-of-pocket qualified medical expenses. However, if you use the money on non-eligible expenses, you still have to pay federal income tax on that amount and an additional 20% penalty if you were still under the age of 65. Once you turn 65, you can take a distribution for any reason without penalty.

Additional Advantages of HSAs:

  • HSAs can pay for qualified medical expenses from prior years, provided the HSA was established before incurring the expense.
  • Even if you are no longer eligible to fund the account, HSAs funds can be invested or taken out to be used for qualified medical expenses.

Growing Your Health Savings Account

Beyond investing to grow your account, you are allowed to contribute to the account each year to give it a little boost! You can decide how much you want to contribute to your Health Savings Account up to the annual contribution limit.

For 2023, the maximum contribution is $3,850 for individuals and $7,750 for families, plus an additional $1,000 “catch-up” contribution for anyone age 55 or older by the end of the tax year. Contribution limits for 2024 will be getting a substantial bump to $4,150 for individuals and $8,300 for family plans.

The good news is, contributions can come from multiple different people: you, your employer, a relative, or anyone else who wants to add to your account is able to do so as long as they are an eligible individual. (Employer contributions are not considered income.) Plus, you can do a one-time transfer from your IRA to your HSA up to the current year's contribution limit.

It is important to stay up to date with recordkeeping. As the account holder, you need to keep receipts in order to prove that your withdrawals were used for qualified health expenses, in case you are ever audited by the IRS. But, other than the minor receipt log, taking tax free distributions are simple. For some custodians, you obtain a debit card linked to your account. For other custodians, like Quest, simply call us and the money is distributed to you for the qualifying expense without needing to submit the receipts. It's important to note, you will need to keep some cash available in your self-directed account if you are planning on taking a distribution to cover a medical expense.

HSAs will be able to grow more quickly if the number of distributions are limited. If you personally pay for smaller health expenses, it will give your HSA more time to grow so that you can cover larger medical expenses down the road.

What IS a Qualified Medical Expense?

The term “qualified medical expense” is actually broad, and in most cases, you will find that what you need for your health is most likely considered qualified. These can include anything from deductibles, copays, prescription drugs, and a wide range of medical, dental and mental health services, plus other out-of-pocket expenses not covered by your health plan like medical supplies and over the counter medicines.

It is important to note that health insurance premiums usually cannot be paid for with HSA withdrawals. The key takeaway here is that many expenses qualify and for a complete list of eligible expenses, see IRS Publication 502, Medical and Dental Expenses.

HSAs are powerful accounts with tax deductible contributions and tax-free distributions for qualified medical expenses. Self-directed HSAs give you the added flexibility to invest in alternative assets like real estate, helping you grow your money faster. Enjoy tax-free growth, while providing a safety net for your family in case of a medical emergency.

If you ever have any questions about the HSA, feel free to call our office at 855-FUN-IRAS and we can provide all the information you need to decide if the Health Savings Account is right for you! To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE

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