Our recent webinar focused on how health savings accounts work as an investment and savings tool. This knowledge is especially critical since open enrollment for health insurance began on November 1. There are requirements you must meet to open and contribute to an HSA. This includes enrolling in a high-deductible healthcare plan (HDHP).
If you do not have many healthcare expenses and/or want to have tighter control and reduce health insurance premium amounts, HSAs offer a great solution. The opportunity to choose to self-direct a health savings account sweetens the benefits.
Self-directed HSAs allow account owners to use alternative investments (like real estate and private equity) to build wealth in the account. Investments in assets besides typical stocks, bonds, and mutual funds can provide significant growth of funds to spend on health care and to reinvest.
You can listen to the recorded webinar that explains how health savings accounts work or read the highlights we recap below.
Webinar host: Alex Perny, business development specialist at Advanta IRA
Tax Advantages of Health Savings Accounts
HSAs provide a tax-advantaged savings avenue for individuals with high-deductible health plans, offering potential investment opportunities and contributing to better healthcare spending habits.
Health savings accounts (HSAs) are a great tool to manage healthcare costs in the U.S. The government encourages these accounts as a way to reduce reliance on Medicare, Medicaid, and Social Security.
Contributions are tax-deductible like those for traditional IRAs. You receive tax-free growth on investments in the account like Roth IRAs provide.
Additionally, HSA distributions are tax-free if used for qualified medical expenses. Alex explains, “HSA distributions are tax-free regardless of age or how long the plan has been in existence as long as these requirements are met: distributions are for qualified medical expenses and expenses are incurred after the HSA is established.”
How Health Savings Accounts Work with Alternative Investments
Self-directed health savings accounts serve as a unique investment vehicle, with the ability to invest in real estate, private equity, gold, private mortgages, and more. This feature enhances the benefits of health savings accounts. Alternative investments provide an additional avenue for savings and investment growth, apart from the primary purpose of covering healthcare costs.
“A self-directed account like an Advanta IRA HSA allows you to invest in basically anything that is not on a publicly traded stock market,” Alex shares. “I’ve seen people who have had multiple rental properties in their HSA, getting into the hundreds of thousands of dollars of value and tens of thousands of dollars in monthly rental income growing in the account.”
Investment income is deposited directly into the HSA and grows on a tax-free basis.
Rules and Requirements of HSAs
Understanding the rules and requirements of an HSA is crucial to avoid penalties and to maximize the benefits.
HSAs have specific restrictions and requirements, such as the “first day of the last month rule.” This requires coverage to be in effect by December 1st to make a full contribution for the current year. All contribution must be made with cash.
Alex also explains prohibited transactions and disqualified persons who can and cannot participate in investments with HSA funds. Disqualified persons include the HSA owner, their spouse, and their lineal ascendants and descendants.
Additionally, you must be enrolled in a high-deductible health care plan, and carry no other healthcare coverage apart from vision, dental, workers comp, or long-term disability insurance.
HSA Webinar Insights at a Glance:
- Health savings accounts are a powerful investing and additional savings tool, especially for healthcare costs in the United States.
- HSAs offer a fantastic avenue for reducing premium amounts for healthcare plans.
- HSA funds are used for a wide variety of future medical expenses and, in some cases, personal expenses.
- It is important to distinguish between HSAs and other healthcare savings accounts, as they have different rules and benefits.
- HSAs have tax advantages, with tax deductions on contributions and tax-free growth on investments.
- Contributions to HSAs must be made in cash and can be made by the individual or their employer.
- You can invest in a wide range of assets, excluding life insurance policies and collectibles.
- Non-qualifying medical expenses for HSAs include healthcare plan premiums (except for Cobra), non-prescription drugs, weight loss programs if they are cosmetic in nature, teeth whitening, nutritional supplements, cosmetic hygiene, babysitting, healthcare club dues, and medical expenses reimbursed by an FSA or medical savings account.
If you have questions about this article or about how health savings accounts work, contact Advanta IRA today.