California HSA Plans - Do HSA Funds Roll Over Each Year?
Do HSA FUnds roll over if you don't use them?
It's one of our top HSA questions that we get daily.
Do the Health Savings Account funds roll over year to year?
It is use it or lose it?
Great question and you'll be happy with the answer.
We'll also go through important notes on the funds that most people don't know!
Just more advantages of the HSA!
You can find details on how to maximize your savings (both health insurance and tax) from HSA's at our Health Savings Account hub but let's talk about the roll-over question.
That's what you came for.
First...some credentials Please!....
You can always jump right to your quote for HSA (HDHP in the title) qualified plans here:
HSA Funds and Roll Over Status
Here's the quick answer...
Funds in your Health Savings Account DO roll-over year to year.
You do not lose them if you do not use them.
Most people get confused because they have had FSA's (Flexible Spending Accounts) which are generally use it or lose it.
If you don't use the funds by the end of the policy or calendar year, FSA funds disappear.
HSA's do not have this limitation.
So what does happen to the funds!
Even better question (and result)!
What happens to HSA funds that roll-over?
This may be the best part of the HSA.
Funds in the account that are not used can earn interest or investment gains/income pre-tax.
Pre-tax!
You just added 30% on average to your returns.
Not bad since the market returns 10% on average.
Each HSA administrator (generally banks) will have different investment options but all are pre-tax.
The investment and interest from the HSA fund doesn't even hit the 1040 tax form since it's pre-tax.
Think of it an IRA with the added advantage that you can pay out for qualified medical/dental plans with pre-tax money!
The funds will just keep rolling over year to year.
You can take them out at 65 with no penalty, but subject to income tax.
You can also take them out before age 65 but subject to income tax and a penalty.
Run your HSA qualified health plan quotes here:
The best way is just to spend down the funds in the HSA that have accumulated for qualified medical and dental expenses.
How HSA Roll-Over Affects Our Strategy
Here's the deal.
Many people will fully fund the HSA each year regardless of how much they spent.
Yes, this takes the cash flow to do that but you're saving about 30% on average in real after-tax money.
That's money in your pocket (or your HSA rollover funds).
Eventually, the amount in the HSA is way above what they would spend for medical services (their max out of pocket essentially) but the tax write-off is still there.
Since the HSA funds roll-over year to year (calendar year), there's no downside to fully funding it.
That was always the issue with FSA's. If I fund $1000 in the account and only use $700, I'm walking away for $300. It just disappears.
That's painful!
The HSA doesn't have this issue so it's in your interest to fully fund it each year if you are able to.
Keep in mind that we only want to use these roll-over funds for qualified medical and dental funds.
Don't spend them on vacation!
If you do, you'll pay income tax and penalty.
As long as you use the roll-over funds for medical and dental...no problem.
Those funds remain pre-tax and investment and interest is pre-tax.
Awesome!
Let's see what this roll-over effect is. It's huge!
The power of tax-deferred Roll Over Effect
It's the best, unkept secret of wealth creation....
The time value of money and compounded interest.
The HSA takes full advantage of this rule with an added advantage.
Let's take a look at how it works.
First, what is the secret?
Basically, money that's left to grow generates a return. You add this return back to be invested and it grows and grows and grows.
Eventually, this turns into significant gains.
It's the reinvestment of interest or gains that eventually runs away!
Quick example:
- You invest $100 and make a 10% return.
- After one year, you have $110.
In year 2, you now make $11 (assuming same 10% gain).
This process keeps going year after year and eventually your gains grow significantly!
Same thing happens with the HSA account.
But with a giant twist!
HSA Pre-Tax Treatment of Roll Over Funds
Take our example above.
There's one thing we left out.
Taxes!
We probably had to pay taxes for the original $100 funding.
That could be anywhere from 20-40% on average.
Our $100 now drops to $60 (assuming 40% tax rate - Fed and State combined).
Ouch!
It's almost like you made 40% return in the first year!
The HSA roll over funds get even more important.
That $40 we would have lost will earn our 10% we talked about or $4 gain in the year 2.
Without the HSA or some other tax favored vehicle, we lose the future earning power of that $40 from year 1...$4 from year 2 and so on.
Compound that loss and it's huge!
Depressingly so.
The net take-away?
Fully fund the HSA account for the initial tax deduction and maybe more importantly....
The tax deferred future gains from the initial funding!
HSA Roll Over Fund Summary
Now you see why the HSA is one of the best kept secrets in the financial world...not to mention the health insurance world!
A quick recap of the benefits:
- HSA Funds roll over year to year
- You do not lose these funds
- Interest and investment is tax-deferred on the initial funding
- Interest and investment is tax-deferred on roll over funds going forward
- You can pay for qualified medical/dental expenses with no tax implication
It's a slam dunk. We love HSA's because they're as close as we come to beating the health insurance and tax system!