Overview of Self-Directed HSA3 min read • April 23, 2019
The way we save and pay for healthcare is always changing. Today, many people have the option of pairing a Health Savings Account (HSA) with a high deductible health insurance plan (HDHP).
If you have an HDHP, you may consider opening and funding an HSA, to help pay for your out-of-pocket medical expenses.
HSAs offer triple tax advantages, including:
- Contributions are deductible from your taxable income
- HSAs grow tax-free
- As long as the money is used for a qualifying medical expense, the withdrawals are also tax-free, up to age 65
Once you (the account holder) turns 65, you can use the funds for any expense, not just health care, without paying a penalty. If you use the money for non-health related items before age 65, you’ll have to pay income tax plus a 20% penalty on the withdrawal. After age 65, you would still have to pay taxes, but no penalty for non-health related items.
HSAs are also portable, so if you switch employers, you get to take the money with you!
Don’t confuse an HSA with a flexible spending account (FSA) for healthcare. FSAs are “use it or lose it.” HSAs are not, the balance carries over year to year so you can build up tax-advantaged savings in the account.
Here’s a quick look at the 2019 HSA limits:
HSA contribution limit (employer + employee):
- Self-only – $3,500
- Family – $7,000
- HSA catch-up contribution (in addition if you are 55 or older): $1,000
You can self-direct your HSA
The money in your HSA can be invested in order to grow. This can be great for self-directed investors who are looking for a way to build additional retirement savings.
If you don’t need the money you’ve contributed to your HSA for healthcare expenses right now, you may consider building your balance by making some nontraditional investments. This is possible with a self-directed health savings account.
Like any self-directed plan, you can choose to include several types of assets like ETFs, stocks, bonds, or mutual funds in your account. You’ll have to do some leg work with your employer to find out what types of investments are allowed.
Also, if you are self-directing your HSA, it has to be with a custodian who allows self-direction. You’ll want to check with your employer to see if yours does, or if you can move it to a custodian who does, like Lively.
Here’s a quick overview of HSA eligibility rules to self-direct your funds:
- You (and your spouse) usually cannot have any additional health coverage than an HDHP. There are a few exceptions, see below
- You cannot be enrolled in Medicare
- You cannot be claimed as a dependent on anyone else’s tax return
- You can rollover amounts from other HSAs
- You need a qualified HSA trustee for this type of account. The HSA can be established through a custodian other than your health plan provider
- In order to self-direct your HSA, you must use a self-directed HSA provider
- If you’re covered by an HDHP and a health FSA or HRA that pays for or reimburses for qualified medical expenses, you likely won’t be able to make HSA contributions
There are a few exceptions to the “other health coverage” rule. IRS publication 969 states that you can have additional insurance that provides benefits for the following:
- Liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property
- A specific disease or illness
- A fixed amount per day (or other period) of hospitalization
You also can have coverage (whether provided through insurance or otherwise) for the following items:
Once you’ve dotted the I’s and crossed the T’s, you can make your money work even harder for you by self-directing your HSA.