Health Savings Accounts (HSAs) are special savings accounts that you can use for current or future health expenses. Your contributions are tax-free.
HSAs were created in 2003 to allow people with high deductibles (HDHPs) to receive tax savings on their medical care. Nowadays, HSAs are a popular savings and treatment option. You also need an HDHP to use an HSA.
Read on to learn more about this healthcare payment option.
An HSA is an account that can help you save on your healthcare costs. You can set aside pre-tax money in your HSA and then use it to pay medical expenses like deductibles or co-payments.
Paying for medical care with your HSA will save you money as the money you put into it will not be taxed. You can only use an HSA if you have an HDHP.
“You can see an HSA account as a way to get a significant discount on your medical expenses.” Julia Petrovsky, a financial planner with Modern Financial Planning, told Healthline.
“It allows you to set aside funds for qualified medical expenses up to an annual limit. These funds avoid all taxes except in California and New Jersey, where state income taxes are still levied. “
An HSA can save you money on your medical expenses. You can set aside money from your pre-tax paycheck and use that money for your health care expenses.
You can deposit money directly from your paycheck or contribute yourself at any time. The money deposited from your paycheck comes out before taxes are deducted. Any money you pay in yourself can be credited as a tax deduction on your tax return.
However, there are a few rules you need to know:
- You’ll need an HDHP with a minimum deductible of $ 1,400 for a single plan or $ 2,800 for a family plan.
- You can contribute $ 3,600 per year for an individual plan or $ 7,200 per year for a family plan.
- The contribution limits include all funds that your employer contributes to your HSA.
The minimum deductible and the maximum contribution amount are set each year by the IRS. These restrictions apply to everyone and are not affected by your job status or income level. The only exception to the limit are people over 55 years of age who are allowed to deposit additional funds.
“The annual contribution limits will be increased by $ 1,000 for those over 55. If two spouses have separate HSA accounts and they are both over 55 years old, the total additional contribution could be up to $ 2,000, ”Petrovsky said.
Any money you don’t spend stays in the account. This is what distinguishes HSAs from flexible spending accounts (FSAs). When you have an FSA, you lose any money you don’t use by the deadline, which is usually the end of the year.
The money you deposit into an HSA stays in your account and is available to you. You can still access these funds even if you run out of HDHP. This can have several advantages.
A great example is Medicare. You generally can’t use your HSA to pay your health insurance premiums, but you can use it to pay Medicare premiums. So, if you contributed to an HSA while at work, you can use those funds to pay your Medicare premiums after retirement.
HSAs and investments
Some HSAs are both savings and investment accounts. If your HSA is an investment account, not only can you put tax-free money aside, but you can also make extra cash. Plus, the funds you make from your investments are tax-free. With other accounts, you can earn interest on the funds in your HSA. Just like the investment income, all interest earned is tax-free.
“If your HSA is investable, the proceeds are also tax-free as long as all withdrawals are used for qualifying medical expenses. HSA accounts are the “Triple Tax Relief Accounts” – contributions of untaxed money, no income tax, and no tax on qualified withdrawals. A trifecta of tax savings, ”Petrovsky told Healthline.
High deductible health insurances are plans that offer lower premiums in exchange for a higher deductible. Generally, high deductible plans pay for preventive measures like vaccines, health exams, and some medications before you meet the deductible.
For all other services, you are responsible for all costs until you meet the deductible. This makes HDHPs very popular with young and healthy people who do not want to pay high premiums and who have very few medical costs.
HSAs are designed to work with HDHPs. You can obtain an HDHP from your employer or from the health insurance marketplace. HDHPs on the health insurance marketplace are marked as high deductible plans so you don’t have to find out for yourself if a plan meets the requirements.
Also, once you have an HDHP, you need to make sure that you:
- have no other health insurance
- are not eligible for Medicare
- cannot be relied on as dependent on someone else’s taxes
There are also set rules for how you can use your HSA funds. Withdrawals are not taxed, but you must make them to pay qualified medical expenses. These expenses include:
- Your deductible
- Doctor’s visit co-payments
- dental care
- Visual aid
- Prescription drugs
- Hospital co-payments or co-insurance
- physical therapy
- Laboratory work
- imaging tests such as MRI or X-ray X
- Mobility aids such as rollators or wheelchairs
- barrier-free equipment for your home
- Care at home
- Care facility
HSAs have several major advantages. You can set aside tax-free money that you can use to pay for medical expenses even if you are no longer enrolled with an HDHP. Your HSA is yours, and you can’t lose it by changing your health insurance or job. There is also no set time it takes to begin withdrawing funds.
You can keep money in your HSA for as long as you want. Plus, with tax-free investment income, your account can grow, and any qualified withdrawals you make are also tax-free.
“The income tax savings aspect of HSAs is the main benefit, followed by the fact that you can keep these funds even if you are no longer covered by a qualified high-deductible health insurance plan, as opposed to FSA plans that are on a” use. ” “Or lose your base,” declared Petrovsky.
“HSA funds have no expiration date. In addition, one does not have to have an income from work to be eligible for contributions. “
HSAs are good for a lot of people, but they’re not for everyone. The biggest disadvantage of an HSA is that you need an HDHP. Unfortunately, HDHPs are not necessarily good choices for people dealing with certain health conditions or chronic illnesses.
“You must have qualified high-deductible health insurance, and for someone with a chronic illness that requires expensive care, for example, the tax savings can offset the high medical costs associated with a high-deductible plan,” Petrovsky told Healthline.
There are a few other potential downsides to having an HSA that you should be aware of:
- Deposits to the account can be a drain on your budget.
- An unexpected illness could destroy the balance of your HSA.
- HDHPs can cause people to avoid getting required medical care.
- The money can only be used tax-free for medical expenses. You pay taxes when you use your HSA money on anything else.
HSAs are great for healthy people looking for a savings plan and health insurance. If you are considering starting a savings plan like a 401 (k) or an IRA, an HSA may be a better choice.
“If you are eligible to make an HSA contribution and have the funds, funding your HSA is a breeze,” said Petrovsky. “If you have to decide between financing your IRA and an investable HSA, choosing the HSA is a wise choice because HSA is the only account with triple tax benefits.”
You can still get vaccinations and other preventive measures, and have saved you money when you need other medical care. You can see your current budget and medical expenses. If medical expenses are only a small part of your budget right now, an HSA might be a smart choice.
People nearing retirement could also do well for an HSA. Remember that if you are over 55 you can donate an additional $ 1,000 each year. Once you are eligible for Medicare, you will no longer be able to make new contributions, but you can spend your HSA funds on Medicare premiums and co-payments.
Your employer can contribute to your HSA. This is a popular workplace benefit. It’s common in companies that offer HDHPs as their primary health insurance option.
Your employer’s contributions will continue to count towards your maximum annual contribution. You can track your employer contributions on your paycheck and your annual W-2. If you are still below the limit, you can pay contributions for the previous year during the tax return.
“This amount will then be reported as the employer’s contribution on Form 8889 on your tax return so you can calculate what additional amount is still to be paid for that tax year,” said Petrovsky. “You can make additional contributions until your tax return is due, usually April 15th.”
HSAs are accounts that you can use to set aside tax-free cash for medical expenses. Often times, the money you deposit brings in interest or investment income.
This income is also tax-free. You can keep money in your HSA for as long as you need it. You need a high deductible health insurance plan to use an HSA.
HSAs can be a great option for generally healthy people on low medical expenses.