By: Joseph Goldy, CFP®
When going through a divorce, there are a million things to think about and plan for - division of assets, child custody arrangements, updating beneficiaries, and more. One aspect often overlooked is what happens to your health insurance and how to manage medical expenses best going forward. This is especially important for divorcees as they will now be managing their own healthcare costs independently rather than on a family plan.
A Health Savings Account (HSA) is a tax-advantaged way to save for future medical expenses that can immensely benefit divorcees. An HSA allows you to contribute pre-tax dollars, grow the money tax-free, and withdraw funds tax-free for qualified medical expenses. Let's look at some of the key advantages of utilizing an HSA after a divorce:
Reduce Taxes
Getting divorced often means a single income is supporting the same household. An HSA allows divorcees to lower their taxable income by contributing pre-tax dollars, providing some relief. For 2024, individuals can contribute up to $3,850 to an HSA, but families can contribute up to $8,300. Those 55 or older can contribute an additional $1,000 yearly catch-up amount.
For divorcees, an HSA provides a substantial tax deduction at a time when tax brackets could become less favorable since a divorcee is now filing as either an Individual or Head of Household rather than Married Filing Jointly. For example, someone in the 24% tax bracket saves $240 in taxes for every $1,000 contributed to their HSA.
Long-Term Savings Vehicle
Unlike a Flexible Spending Account (FSA), in which you lose unspent money at the end of the year, HSA funds roll over indefinitely. This makes an HSA a powerful long-term savings tool for future medical costs in retirement when expenses tend to be higher. Contribution limits, investment growth potential, and tax-free withdrawals make HSAs function similarly to 401(k) accounts specifically for healthcare spending. Additionally, after age 65, funds in an HSA can be used for any expense, not just medical, without incurring a penalty. However, you will pay taxes on any funds withdrawn for non-medical expenses.
COBRA & Insurance Flexibility
When a divorce is finalized, COBRA continuation of the prior family health insurance is an option. Still, it can be costly when the ex-spouse no longer contributes to premiums. An HSA-qualified high-deductible health plan (HDHP) may provide cheaper monthly premiums. HSA funds can then be used tax-free to cover the higher deductible. Unlike other accounts, HSA funds are not use-it-or-lose-it, so unspent money remains available in the future. A lesser-known benefit of HSA accounts is that you can use the funds to pay for Medicare Part B and D premiums for those 65 and older.
Investment Options
Much like a 401(k), many HSA providers allow accountholders to invest HSA dollars to grow the balance over time. This makes HSAs a great option for younger divorcees who may have lower medical expenses now but want to prepare for rising healthcare costs in the future.
Asset Protection
In most states, HSA assets receive creditor protection in cases like bankruptcy or legal judgments against the account holder. For divorcees concerned about outstanding legal or jointly-held debt, the asset protection benefits of an HSA can provide some financial security.
Tax-Free Money for Family
For divorcees with children, the entire family's qualified out-of-pocket medical expenses are HSA-eligible, even if the parent's health insurance plan does not cover the children. This allows divorcees to use HSA funds tax-free for expenses like braces, eyeglasses, prescriptions, and more for eligible dependents.
As divorcees take the difficult but necessary step to becoming single again, opening and contributing to an HSA is a smart way to plan for future medical costs while realizing some great tax benefits today. Talk to your HIGHLAND financial advisor about including an HSA in your overall divorce financial strategy.
Joseph Goldy, CFP®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.