Updated: Dec 10, 2021
If you’re a dentist looking for tax-deductions, or ways to afford skyrocketing health care costs, while having the ability to grow your money, you may want to consider funding an HSA (Health Savings Account).
What is a Health Savings Account (HSA)?
The IRS defines an HSA as a tax-favored account which you can set up to accumulate money to pay for qualified health care expenses.
To be eligible to set up and fund an HSA, you must be covered by a qualifying high deductible health plan (HDHP), an insurance policy with a deductible of at least $1,400 for individual coverage or $2,800 for family coverage. There are additional requirements for an insurance policy to be a qualifying HDHP, so the best way to verify that you have a qualifying plan is to see if your insurance policy has “HSA” in the name, such as “Regence Preferred Bronze HSA”, or to simply ask your health insurance agent. If you have other non-HDHP coverage, including Medicare, you will not be eligible for an HSA.
What are the tax benefits of funding an HSA and how funding a retirement plan or Roth IRA compares?
Many dentists are in a high-bracket and are searching for tax-deductions. Funding an HSA can be an important part of a financial plan offering the following valuable benefits:
Tax-deductible contributions, regardless of your income.
Tax free growth on HSA account
Withdrawals from an HSA are not taxable as long as they are used for qualified medical expenses. (See IRS Publication 969, page 9)
Because HSAs grow tax-free, some dentists choose to invest those funds in stock-based investment options in hopes of increasing the value of their HSA prior to retirement. By investing HSA funds in stock-based investment options, they can have a significant amount of growth potential over the long-term. The real benefit of an HSA is that these funds grow tax-free if they are withdrawn for qualified medical expenses. So as an effective investment strategy for future medical expenses inevitable in retirement, the longer these funds can grow tax-free, the better.
The chart below illustrates the tax benefits, comparing an HSA to retirement plan and Roth IRA. Retiring dentists can plan to withdraw HSA funds to pay for qualified medical expenses.
How much can I contribute to an HSA?
If you qualify to make an HSA contribution in 2021, you can contribute the following amounts based on the type of coverage you have and your age:
One of the benefits of an HSA over a retirement plan, is that a dentist can make an HSA contribution without having to make contributions for his employees.
Contributions to HSAs can be made up until April 15th of the previous year. For example, a 2021 HSA contribution can be made up until April 15, 2022.
Where can I set up an HSA Account?
HSAs can be set up at a variety of financial institutions including banks and brokerage accounts. If a dentist would like to invest their HSA contributions, we recommend that they set up an HSA at Lively (https://livelyme.com/). Lively does not charge any monthly fees for individuals to set up an account. In addition, once someone sets up an HSA at Lively, they will have the option of opening a TD Ameritrade self-directed brokerage account in which they can invest this money. Although we can’t set up these accounts for clients, we can invest the funds for them once the account is established.
How is the most appropriate way to use the money in my HSA?
You can always withdraw your HSA funds tax-free to use them for qualified medical expenses. According to IRS Publication 969, if you are under age 65 and withdraw HSA funds for a purpose other than paying for a qualified medical expense, the amount of the withdrawal will be taxed as ordinary income and be subject to a 20% penalty. This 20% penalty does not apply for non-qualified medical expense withdrawals at age 65 or older.
Assuming you have invested your HSA funds and plan to use them in retirement, it is important to be much more conservative with your HSA investments the closer you get to retirement. Then when you have qualified medical expenses during retirement, that is a great time to use these funds since you will not have to pay any income tax on these withdrawals. Please make sure that you keep a record of your medical expenses and the amount of your HSA withdrawals to verify that your withdrawals do not exceed your qualified medical expenses in any given year. Also, you are not allowed to report a qualified medical expense as an itemized deduction on your tax return and use HSA funds to pay for this expense.
 See https://support.livelyme.com/hc/en-us/articles/360001689932-Are-HSAs-tax-deductible-at-the-state-level-, page 3. While all HSA contributions are tax-deductible on the Federal level, most HSA contributions are tax-deductible on the state level with the exception of California and New Jersey.
 Ibid, page 5.