Gray Girlfriend's Guide to Divorce

The Health Savings Account

by Amy Lawson, MBA, CDFA®

As I mentioned a few weeks ago, with the current, crazy stock market volatility, it is stressful to watch our portfolios nose-dive.  As I also mentioned, this white-knuckled ride can be especially for difficult for someone facing a huge life event, such as retirement, or divorce.

The first week we talked about annuities and how they’ve evolved and because they have evolved, it’s OK to consider them as part of comprehensive financial plan, provided, of course, that it’s a good one.

The second week we talked about a type of life insurance policy called an index universal life policy, or IUL.  The IUL allows you to accumulate interest based on the performance of an index, such as the S&P 500, cash you may take out down the road.  Cash that is TAX-FREE. 

The third week we talked about the ROTH and why you should consider taking advantage of it any way you can. 

This week we are going to talk about the Heath Savings Account. 

So, What Is A Health Savings Account?

A Health Savings Account, or HSA, is a tax-exempt account that helps people with a high deductible pay for out-of-pocket expenses not covered by their health insurance. 

How High Must The Deductible Be In Order to Be Considered “High?” 

The minimum deductible varies by year and as with most things that boast the term “tax-free” or “tax-exempt” or “tax-deferred,” the IRS determines the amount.  For 2020, for an individual, the deductible must be $1,400 or higher; for a family, the deductible must be $2,800 or higher. 

How Do I Qualify? 

To qualify you must be enrolled in a high-deductible health plan, or HDHP; not be enrolled in Medicare; not be claimed as a dependent on someone else’s tax return, or have no other employee health plans.

How Does An HSA Work?

The HSA allows you to make pre-tax contributions that can be used to pay for qualified medical expenses not covered by the HDHP.  Because the contributions are pre-tax, the contributions lower your taxable income.  As long as the withdrawals are used to pay for qualified medical expenses, the amount withdrawn are not taxed, i.e., the withdrawals are TAX-FREE.

What Can I Use The Money For?

You may use the money qualified medical expenses include deductibles, dental services, vision care, prescription drugs, copays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan.  For a full list, check out IRS Publication 502, Medical and Dental Expenses.

How Much May I Contribute? 

In 2020, an individual may contribute up to $3,550; and individual over age 55 may contribute an extra $1,000.  A family may contribute up to $7,100.  If you are age 55 and are the primary insured on a HDHP, you may contribute an extra $1,000. 

How Do I Set Up An HSA?

You may set up an HSA at most banks, credit unions, insurance agents, financial brokers or with your health insurance provider.  Depending on the provider, you may set up the account in person, by mail, over the phone or online.  Because not all financial institutions are created equal, before you sign the on the dotted line, ask if the provider charges any type of administrative fee or service charge and, if so, how much?  Is the fee charged annually, quarterly, or monthly? (Side note:  Credit unions typically have lower service charges than do banks.)

How Do I Contribute To An HSA?

If you set up your HSA at a bank or credit union, you may make your contributions by check, electronic funds transfer, or bank wire.  If you already have a checking or savings account at the same institution, you may transfer the money from your checking or savings account into your HSA, either online or by check.

Is There A Deadline On Contributions?

Your HSA contributions must be made no later than the April tax deadline.

Is There A Penalty To Withdraw Funds From My HSA?

If you withdraw funds prior to age 65, you will incur a 20% early withdrawal penalty. 

Am I REQUIRED To Make Money From My HSA At Some Point?

Unlike an IRA or 401(k), you are NOT required to make a required minimum distribution at any point. 

May I Invest The Money I Contribute, Or Does It Have To Stay In Cash?

Some providers of HSAs offer investment options, while others require the funds to stay in cash.  ASK the provider what investment options they offer, if any. 

What If I Don’t Use The Entire Amount I Contribute Each Year?   

Any unused contributions are rolled over to the following year, which means you can accumulate a large cash balance for your future medical expenses.   That’s a HUGE benefit!

How Do I Withdrawal Funds?

Depending on the provider, you may have a debit card or a check book.

What Happens To The Account If I Die? 

If your spouse is your beneficiary, it will be treated as your spouse’s HSA.  If your spouse is NOT your beneficiary, the account stops being an HSA with the fair market value of the HSA becoming taxable to your beneficiary in the year in which you die.  The amount taxable to your beneficiary is reduced by any of your qualified medical expenses paid by the beneficiary within one year of your death.  If your estate is the beneficiary, the value is included on your final income tax return.

How Does The HSA Differ From A Flexible Spending Account, FSA?

With the FSA, there is no deductible or out-of-pocket maximum.  The money in the FSA has to be spent within the same year it’s contributed.  The money must remain in cash, i.e., it may NOT be invested. 

What Are The Benefits Of An HSA In A Nutshell? 

HSAs offer triple tax-free benefits:  pre-tax contributions, tax-deferred growth, and tax-free withdrawals for qualified expenses.

  • Your contributions are made on a pre-tax basis = they lower your taxable income
  • Qualified expenses are paid with tax-exempt dollars = more buying power
  • Unused dollars are rolled over to the following year = you may maximize your contributions each year = you can accumulate a large balance for future medical expenses
  • You may invest the funds = they have the potential to grow over time

Want to learn more?  We’re here to help.

Wishing you peace & plenty of tax-free cash!

Your gray girlfriend,


About the Author

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Amy Lawson, MBA, CDFA®

As a divorced baby boomer, Amy, an independent investment advisor since 2001, formally expanded her services in 2016 to help older women navigate the daunting financial minefield of divorce after meeting numerous smart, well-educated, divorced women who lacked the funds to secure their financial futures.  She understands that for older women facing divorce, achieving an equitable divorce settlement is the first step.

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