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INDIVIDUALSFINANCIAL PLANNING
PERSONAL

qualified medical expenses with non- 30% marginal tax rate. M and J are older. B is a successful self-employed
HSA funds is that these payments be- in good physical condition, but an- consultant who earns approximately
come highly flexible, heavily tax-favored nual vision, dental, and menstrual $300,000 annually, an amount
investments. Of course, if non-HSA care; wellness checks; and over-the- that trends upward a bit each year.
savings or after-tax investments are not counter medicine costs total $2,500 Starting in 2021, they switch to an
available to pay medical costs, HSA per year, which M and J carefully HDHP and begin contributing (and
funds can be used. But using HSA funds document and pay out of pocket deducting) the maximum per year,
to pay qualified medical expenses should without requesting reimbursement which is $7,200 and is assumed to
be a last resort, not the default strategy. from the HSA. The HSA funds are increase $100 per year; they add
invested and earn 8% annually. $1,000 per year to their contribu-
Examples of applying the tions when B turns 55 in 2025.
strategy The couple buy a house in 2027 Annual reimbursable medical costs
after having a baby in 2025. The couple from 2021 to 2035 begin at $3,500
Example 1: M (age 25) and J (age planned and paid for the $6,000 cost of and increase by $200 per year; these
24) married in 2021. M works for a having the baby out of pocket, including costs are paid out of pocket, but the
large public accounting firm, and J prenatal care and two hospital nights.2 receipts are carefully maintained.
freelances as a graphic design art- By 2027, the balance in the HSA has The HSA funds are invested and
ist. Starting in 2021, each year, M’s grown to $27,839, which includes earn 8% annually.
employer pays the cost of family $6,839 of tax-free income. In 2027, the
HDHP coverage and contributes couple submit reimbursable receipts that Just before B retires, shortly after
$2,000 to M’s HSA. In addition, M total $23,500, the proceeds of which reaching age 65, they buy a second home
and J annually contribute $1,000 to finance a portion of the down payment in an active retirement community. Part
the HSA and claim a deduction for on the house.3 of the down payment for the home
this amount on their joint tax return; is the $73,500 supported by medical
this $1,000 pretax contribution is Example 2: B (age 51) and G (age 47) receipts that they withdraw tax-free
considerably smaller than would be are empty nesters at the beginning from their HSA. After the withdrawal,
required for traditional full-coverage of their high-income years and begin $162,924 remains in the HSA earn-
health insurance. The net annual considering the heavier medical costs ing 8% annually. These funds can be
cost is $700 after considering their that are likely to come with getting withdrawn tax-free to pay premiums for

2. See Cautero, “One Mom Shares How Much It Cost to Have a Baby With an HDHP,” Northwestern Mutual website (Oct. 21, 2020).
3. Details of the M and J computations can be viewed here.

EXECUTIVE SUMMARY contributions within these limits defer reimbursement from the
are tax-deductible. HSA for medical expenses paid
• Besides providing a tax-favorable until the time he or she chooses.
option for taxpayers to pay out- • Withdrawals from HSAs are By deferring reimbursement of
of-pocket medical expenses, tax-free to the extent that they medical expenses, contributions
HSAs can be used as a flexible are used to pay qualified medical to an HSA can grow tax-free,
tax-favored investment vehicle. expenses, including expenses similar to contributions to an IRA
for over-the-counter drugs and or Roth IRA.
• Annual contributions to an HSA menstrual care products. There
are limited in 2022 to $3,650 for is no time limit on a taxpayer • Withdrawals of the amounts a
an individual self-only plan or requesting reimbursement from taxpayer contributes to the HSA
$7,300 for a family plan ($3,600 an HSA for a medical expense he plus investment earnings, up
and $7,200, respectively, in 2021). or she paid with funds outside the to the amount of accumulated
An additional $1,000 is allowed HSA. reimbursable medical expenses,
for taxpayers who reach age 55 can be taken tax-free when the
by the end of the tax year. HSA • Because there is no reimburse- taxpayer chooses to request
ment time limit, a taxpayer can reimbursement.

28 April 2022 The Tax Adviser