Should dentists use an HSA?

November 18, 2022 | Robbie Morris

Robbie Morris, CSLP®
Robbie Morris, CSLP®
Hey! I'm Robbie, the founder of Roots Financial Planning, a fee-only, fiduciary advisor located in San Antonio, TX working virtually with dentists across the United States. When I'm not helping dentists live their best life, you can find me making pizza, swimming, or skiing.

HSAs have a unique set of attributes unlike any other type of investment account. They can be a great fit for many dentists when used appropriately.

What is an HSA?

A Health Savings Account (HSA) is a type of investment account that is meant to be used for qualifying medical expenses. You must be enrolled in a High Deductible Health Plan (HDHP) to be eligible to contribute. Each year you are eligible, you can make a limited contribution to the account and invest the funds as you see fit. The funds do not expire as they would in a Flexible Spending Account (FSA). And the most important benefit is that money is not taxed when contributed to the account, the growth of the money is not taxed, and withdrawals are not taxed (when used for qualifying medical expenses).

What is a HDHP?

A High Deductible Health Plan (HDHP) is a health insurance plan with a higher deductible and out of pocket costs than most plans. The trade-off for higher out of pocket costs is a lower monthly premium. This can often be good choice for young, healthy individuals. A HDHP can be found in employer insurance packages and in the healthcare marketplace. This type of plan is often labeled as HDHP or HSA eligible wherever you are shopping for plans. The minimum required deductible for 2022 is $1,400 for individual coverage and $2,800 for family coverage.

What is a qualifying medical expense?

Qualified medical expenses are determined by the IRS and are too numerous to list here. The IRS has an entire publication dedicated to this topic. In short, it includes medical and dental expenses that are necessary for prevention, mitigation, and treatment. Generally, if it is not for cosmetic purposes only, it will qualify. Additionally, when you are 65 years or older you can use a HSA to pay for Medicare premiums.

Who can contribute to an HSA?

Any US taxpayer can contribute to a HSA as long as they are enrolled in a HDHP for the year.

How do you contribute to an HSA?

Contributions can be made in a couple different ways. One way is through payroll deduction from your employer. If you are using a HDHP provided by your employer’s insurance benefits it might automatically create an HSA account for you. This allows the payroll company to send contributions from your paycheck. An added bonus of this method is that it allows the contributions to avoid payroll taxes in addition to income tax.

The second contribution method is through bank transfer or check deposit.

How much can you contribute to an HSA?

In 2023, if you are covered by a HDHP for you alone you may contribute up to $3,850. If you and your family are covered by a family plan you may contribute up to $7,750.

What if you want to withdraw money for non-qualifying expenses?

If you want to withdraw money from a HSA that is not for a healthcare expense there are pretty steep penalties. If you withdraw money, and you are less than 65 years old the money will be taxed at your federal income tax rate plus a 20% penalty. If you are older than 65, the 20% penalty is removed, though the withdrawal is still taxed at your federal income tax rate.

HSAs are one of the most superior accounts when it comes to tax free savings. Most people can expect their healthcare costs to increase dramatically as they get older. Because of this fact, using an HSA to save for healthcare expenses later in life is often a no-brainer. Be sure to consider your unique circumstances to decide if a HDHP and a HSA are a good combination for you.