How to Invest in Your Health in 2022

Posted by: Joseph Kuo | March 18, 2022

Health care is one of the essential parts of life's financial and personal journey. Many have not yet utilized all the financial tools that may help.

Health care is one of the essential parts of life’s financial and personal journey. Many have not yet utilized all the financial tools that may help. A Health Savings Account or Flexible Spending Account can go a long way towards managing medical expenses for you and your family.

Health Savings Accounts

A Health Savings Account (HSA) gives you a tax-exempt savings account to pay for your health care expenses. The money you don’t spend in one health plan year rolls over to the next. Enrolling in an HSA also gives you an HDHP (High Deductible Health Plan), in which you pay a lower monthly premium, but your insurance company will only pick up the tab for significant health care expenses (including types of preventive care, maternity care, and pediatric primary care).

A large draw for many are the tax benefits inherent to HSAs:

  • Contributions through an employer are always pre-tax.
  • You can invest the funds after your account balance reaches a certain level.
  • Distributions for qualified health expenses aren’t taxable.

Unlike a Flexible Spending Account (FSA), which is funded with pre-tax dollars but must generally be used by the end of the year, HSA contributions can remain in your account to be used for future medical bills at any time. In short, this means there is no “use it or lose it” penalty. It also means that you can effectively use an HSA as an additional retirement account specifically for medical expenses.

Keep in mind that if you spend your HSA funds for non-qualified expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for non-qualified expenses. These restrictions aside, HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

Health Spending Account Contribution Limits Are Adjusted Annually for Inflation

For 2022, the self-only contribution limit is $3,650 or $7,300 for families. This is a $50 increase for individuals and a $100 increase for families from 2021. The contribution limit includes contributions from both employers and employees (or family members).

These adjustments are rounded to the nearest $50 to account for inflation rates, which are determined using the Consumer Price Index for All Urban Consumers.

How to Use Your HSA

The IRS or your Health Savings Account provider are great sources when getting started. For example, the IRS recently issued a reminder that at-home COVID-19 tests, face masks, and sanitizing wipes can all be purchased or qualify for reimbursement through an HSA. HSAs can also be used for related expenses such as over the counter medications and even some dependent care expenses. The IRS offers an interactive assessment tool that can take the guesswork out of what qualifies as an HSA-friendly expense.

In the traditional insurance plan, you pay high premiums up front. In the HDHP, you pay lower monthly premiums and essentially assign the savings to your own health care expense account, which you can then grow via investment. So if you are younger and are not currently incurring large medical expenses, you should pay current medical expenses out of pocket while growing the HSA via deposits and investments. Your deposits will be with pre-tax dollars, the account will grow tax free. This way, you can get the maximum benefit from the HSA. Then upon retirement, when medical expenses are likely to be greater, you can start taking withdrawals from the HSA as needed.

Flexible Spending Accounts

With a Flexible Spending Account (FSA), you deduct pre-tax dollars out of your salary to pay qualified medical expenses. You can designate an FSA for your health care expenses or those of a dependent. But most FSAs are “use it or lose it”—at the end of the plan year, the money left in the account doesn’t roll over into the following year. Some plans may allow up to a 2.5 month grace period into the new year to use any left over fund, or allow a limited amount to be rolled over to the next year. Employees tend to minimally fund FSAs, although they can be used in conjunction with HSAs.

Consolidating Medical Procedures

If your medical expenses are more than 7.5% of your Adjusted Gross Income (AGI), you may be able to use them to cut your tax bill. This includes payments to doctors, dentists, surgeons, mental health practitioners and other medical bills. It can also extend to hospital care, nursing home care, additional programs, prescription drugs, insulin, and more. For some, this incentivizes consolidating eligible medical procedures within a single tax year rather than spreading them across multiple years when they might not meet the threshold.

If you’re considering this option, you will want to keep good records because you need to itemize all your deductions via Schedule A on your tax return. Ultimately, it may be a good idea to schedule your treatments carefully, as you will only be able to claim costs accrued in the same year. There’s no carry-over. If you can arrange them so that your charges amount to the necessary portion of your AGI, it can be to your advantage when tax time comes.

Whether you choose to take advantage of an HSA, FSA or consolidating your medical procedures to itemize your medical deductions, it may be helpful to reach out to a financial professional so that you can get the most out of each option. A financial professional can also assist you with HSA investment strategies.

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