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Retirement Planning

HSAs and HRAs: What you need to know

Healthcare is one of the most significant financial obstacles you will encounter.

As medical costs continue to rise, you may be wondering how to best save for the future. By being informed about each tool and the options they present, you can make investment decisions that are in your best interest.

What is an HSA?

A Health Savings Account (HSA) is an individually owned, tax-free account that must be linked with a high deductible health care plan. As the name suggests, it's a savings account intended to pay for a large range of medical expenses - from doctor visits to prescription drugs - simply by using a debit card or checkbook.

Most people contribute to an HSA through pre-tax payroll deductions, which helps lower their tax obligations. For 2023, individuals with single coverage can contribute up $3,850 per year to an HSA. Families can contribute up to $7,750.1

What is an HRA?

A Health Reimbursement Arrangement (HRA) is controlled by an employer and 100% employer funded. Although HRAs can be offered with any type of health care plan, most don't pay interest or allow individuals to contribute directly. Unlike HSAs, many HRAs do not have contribution limits.

HSAs vs. HRAs

Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) are two tools that can help you manage your spending. While both provide support to pay for healthcare expenses, HSAs and HRAs differ in key ways.

Because of their similar sounding acronyms, it can be easy to confuse HSAs and HRAs. In order to help you choose between an HSA or HRA, here is a breakdown of the key differences.

1. Rollover eligibility

There are two types of HSA rollovers. The first simply involves carrying over unused funds from one year to the next. HSAs allow you to save unused funds and accrue interest. If you are happy with your current HSA, you can let the funds grow protected from taxation.

The second type of HSA rollover involves withdrawing funds from one HSA and depositing them in another. The rollover must be completed within 60 days of the distribution or you'll pay income taxes plus a 20% penalty on the amount. The IRS limits you to one HSA rollover per year. Rollover contributions aren't deductible or taxed as income. If you are looking to rollover your HSA, speak with your financial advisor about the IRS' rules and potential fees charged by your provider for transferring.

The monies in an HRA, on the other hand, might not roll over from year to year depending on the plan. Some HRAs are truly "use it or lose it." Unused funds in those plans revert back to the employer at the end of the year.

2. Tax advantages

HSAs provide three appealing tax benefits:

  1. Contributions are tax-deductible (or if made through a payroll deduction, they are pre tax).
  2. Earnings accrue tax-free.
  3. Withdrawals for qualified health care expenses are tax-free.

HRAs also offer tax savings. Since HRAs are funded by employers, reimbursements are tax-free for employees and excluded from their gross income.

3. Impact on retirement

HSAs can function like a traditional Individual Retirement Account (IRA) in retirement. Those aged 65 or older can withdraw HSA funds for non-medical expenses without being charged the 20% penalty. Withdrawals for qualified medical expenses will still be tax-free.

In most cases, HRA funds are not available to you after retirement, although some companies have introduced a special HRA known as a Retiree Health Reimbursement Account (RHRA). Speak with your employer about options that are available to you.

In general, both HSAs and HRAs can offer great value when it comes to managing health care costs. When planning for the future, consider the differences and similarities between HSAs and HRAs to prepare for inevitable expenses and plan for years of retirement ahead.

1. Internal Revenue Service


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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective or its subsidiaries.

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