How to Invest in Your Health in 2022
About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual Fiduciary Financial Planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals.
Download our quick reference guide that covers the most important annual limits and figures for 2022.
How to Invest in Your Health in 2022
Healthcare 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 Savings Accounts (HSAs)
An HSA gives you a tax-exempt savings account to pay for your healthcare expenses. The money you don't spend in one health plan year rolls over to the next. You are also enrolled in an HDHP (High Deductible Health Plan), in which your insurance company will only pick up the tab for significant healthcare 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 be used by a specific deadline, 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.1
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. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.
HSA 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.2
How to Use Your HSA
The IRS or your HSA 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. In addition, the IRS offers an interactive assessment tool that can take the guesswork out of what qualifies as an HSA-friendly expense.3
In the traditional insurance plan, you pay high premiums upfront; in the HDHP, you pay lower premiums and essentially assign the savings to your own healthcare expense account.
Flexible Spending Accounts (FSAs)
With an FSA, you deduct pre-tax dollars out of your salary to pay qualified medical expenses. You can designate an FSA for your healthcare 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. Employees tend to minimally fund FSAs, although they can be used in conjunction with HSAs.
Read the quotes I shared with The Wall Street Journal in the article What Is an FSA and How Does It Work?
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 these through 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.4
Whether you consider taking on an HSA, FSA, or consolidating your medical procedures, it may be helpful to reach out to a financial professional to talk about these options ahead of the new year.
Dream Financial Planning Process ™
Whether you're managing student loan debt, starting a family, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals in their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. So if you're looking for guidance on Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments, we can help.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio, feel free to send me an e-mail.
In the August Newsletter, I explore how you should invest money for your short-term goals after you've established an emergency fund. I also discuss how a Financial Advisor can help you avoid emotional decision-making with U.S. News and World Report and how to know if your Financial Advisor is the right fit for you. There are also blog posts where I outline how to complete a mid-year financial check-up and 5 college planning mistakes to avoid.
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