Although much has been made of HSAs as a saving-then-spending vehicle for health care, they are also an investment tool, and a way to prepare for health care expenses in retirement.

Here are 7 FAQs that reveal more about those topics.  (All photos: Shutterstock)

Yes. There are a number of taxable benefits for HSA owners.

·Tax-Free Distributions. HSA owners can use an HSA tax-free to pay for qualified medical expenses for themselves, their spouse/partner, and their dependents.

·Tax-Deductible Individual Contributions. HSA owners can deduct HSA contributions on their federal and, in most cases, their state income tax returns. HSA owners do not need to itemize to get the tax deduction (it’s an “above-the-line” deduction) and there are no income limits. There are HSA limits as to how much a person can contribute, but the limits are high compared to Flexible Spending Accounts (a common alternative to an HSA). [See next slide for the rest.]

·Pretax Employer Contributions. Contributions made pretax by an employer (employer contributions or employee payroll deferral) are not included as taxable income on the HSA owner’s IRS Form W-2. HSA owners avoid federal income taxes, Social Security taxes, Medicare taxes (together with Social Security referred to as FICA), Federal Unemployment Taxes (FUTA), Railroad Retirement Tax Act, and in most cases state income and State Unemployment Taxes (SUTA). Because employer contributions are never included in income, HSA owners cannot deduct them on their income tax return.

·Earnings Grow Tax-Free. Any interest or other earnings grow tax-free in the HSA.

No, the prohibited transaction rules prevent HSA owners from directly selling any assets they already own to their HSAs. Plus, new HSA contributions must be in cash. HSA owners could transfer assets in-kind, including stock, from one HSA to another HSA.

The law allows individuals a one-time transfer of IRA assets to fund an HSA provided:

(1)they are eligible for an HSA,

(2)they have a permitted IRA with sufficient funds,

(3)they have not already completed an IRA to HSA funding distribution, and

(4)the names and Social Security numbers are the same on the IRA and HSA.

The amount transferred may not exceed the amount of one year’s HSA contribution limit. The technical term for this transaction is a “qualified HSA funding distribution,” not “transfer.

No. Qualified HSA funding distributions are not permitted from a 401(k) plan to an HSA.

Although a full review of the rules for moving funds from a 401(k) plan to an IRA are beyond the scope of this answer, some taxpayers could move money to an IRA from a 401(k) and then move the money to an HSA. This extra step is relatively painless for someone with an existing IRA that offers a money market or equivalent cash type investment. A person that must first establish an IRA for the sole purpose of using it as a conduit to fund the HSA will face a bit more complexity. IRA custodians often have some rules built into their IRA investments that penalize early withdrawals or early closings of an IRA.

Basically, this option is important for HSA owners that need another source of funds for their HSAs. A person facing large medical expenses prior to having the time to build up an HSA balance is a candidate for funding an HSA with an IRA. IRAs and HSAs are creations of the tax code and the main reason to complete an IRA to HSA funding should be tax-driven. In addition, this rule gives taxpayers a method to avoid paying taxes and penalties on an IRA distribution necessary to pay medical expenses.

HSA owners can use funds in their HSA to pay for the qualified medical expenses of themselves, their spouse and their dependents.

Yes. At age sixty-five an HSA owner can take penalty-free distributions from the HSA for any reason. In order to be tax-free the distribution must be for a qualified medical expense. Given that Medicare does not cover all of a person’s medical expenses and that Medicare charges a premium that can be paid for with HSA funds tax-free, it makes sense for most HSA owners after the age of sixty-five to only use their HSA for qualified medical expenses. This will ensure they get the maximum tax benefits from their HSA.