Health savings account (HSA) are specialised savings accounts that can be used for current or future healthcare expenses. Your contributions are tax-deductible.
Health saving accounts (HSAs) were created in 2003 to allow people with high deductible health plans (HDHPs) to save money on medical expenses. Health saving accounts (HSAs) are now a popular way to save for and pay for medical expenses. To use an HSA, you must also have an HDHP.
What exactly are health savings accounts?
A Health savings account (HSA) is a savings account that you can use to pay for your medical expenses. You can put pretax money into your HSA and use it to pay for things like deductibles or copayments.
Using your Health savings account (HSA) to pay for medical care saves you money because the funds you deposit are not taxed. You can only use a Health savings account (HSA) if you have an HDHP.
“You can think of a Health savings account (HSA) account as a way to get a significant discount on your medical costs,” Yulia Petrovsky of Modern Financial Planning told Healthline.
“It allows you to set aside money to pay for qualified medical expenses up to a certain limit each year.” Except in California and New Jersey, where state income taxes are still levied, these funds are tax-free.
How does a Health savings account (HSA) function?
A health savings account (HSA) allows you to save money on medical expenses. You can set aside money from your paycheck before taxes to put toward your healthcare costs.
You can contribute money directly from your paycheck or at any time on your own. Contributions from your paycheck will be deducted before taxes are deducted. When you file your taxes, any money you contribute on your own can be deducted as a tax deduction.
However, there are a few ground rules to follow:
- You must have an HDHP with a deductible of at least $1,400 for an individual plan or $2,800 for a family plan.
- An individual plan allows you to contribute $3,600 per year, while a family plan allows you to contribute $7,200 per year.
- Contribution limits include any funds contributed to your Health savings account (HSA) by your employer.
The IRS establishes the minimum deductible and maximum contribution levels each year. These restrictions apply to everyone and are unaffected by your employment status or income level. The only exception to the limit is for people over the age of 55, who can contribute more money.
“Annual contribution limits for those over 55 are increased by $1,000.” If both spouses have separate Health savings account (HSA) accounts and are over the age of 55, the total additional contribution could be $2,000, “Petrovsky explained.
Any funds you do not spend will remain in your account. This distinguishes HSAs from flexible spending accounts (FSAs). When you have an FSA, any money you don’t use by the deadline, which is usually at the end of the year, is forfeited.
The money you put into a Health savings account (HSA) stays in your account and is available for use. Even if you no longer have an HDHP, you will be able to access these funds. This has a number of advantages.
Medicare is a great example. You can’t use your Health savings account (HSA) to pay for health insurance premiums, but you can use it to pay Medicare premiums. So, if you contributed to an HSA while working, you could use the money to pay your Medicare premiums after you retired. Also Check: Top 6 Best Medicare Dental Insurance for Seniors For 2022.
Investments and Health savings account (HSAs)
Some Health savings accounts (HSAs) function as both savings and investment accounts. When your Health savings account (HSA) is an investment account, you can not only save money tax-free but also earn money. Furthermore, the profits from your investments are tax-free. Other accounts allow you to earn interest on your HSA funds. Interest earned, like investment earnings, is tax-free.
If your Health savings account (HSA) is investable, the earnings are tax-free if all withdrawals are used for qualified medical expenses. Health savings account (HSA) accounts are known as “triple tax advantage” accounts because they allow for untaxed contributions, no tax on earnings, and no tax on qualified withdrawals. “It’s a trifecta of tax breaks,” Petrovsky told Healthline.
What are the benefits of a Health savings account (HSA)?
HSAs offer several significant benefits. You can set aside tax-free funds for medical expenses even if you are no longer enrolled in an HDHP. Your Health savings account (HSA) is yours, and you cannot lose it if you change your health insurance plans or jobs. There is also no set time limit for beginning withdrawals.
You are free to keep money in your Health savings account (HSA) for as long as you want. Your account can also grow tax-free if you earn money from investments, and any qualified withdrawals you make are also tax-free.
“The main advantage of HSAs is the income tax savings aspect, followed by the fact that those funds are yours to keep, even if you no longer have coverage under a qualified high deductible health plan, unlike FSA plans that work on a ‘use it or lose it’ basis,” Petrovsky explained.
“HSA funds do not have an expiration date.” Furthermore, you are not required to have earned income to be eligible for contributions. “
What are the drawbacks to a Health savings account (HSA)?
HSAs are ideal for many people, but they are not for everyone. The main disadvantage of an HSA is that you must have an HDHP. Unfortunately, HDHPs aren’t always a good option for people who have certain health conditions or chronic illnesses.
“You must have a qualified high-deductible health insurance plan,” Petrovsky told Healthline. “If you have a chronic illness that requires expensive care, the tax savings may not be worth the high out-of-pocket medical costs of a high-deductible plan.”
There are a few other potential drawbacks to an HSA to consider:
- Contributing to the account can put a strain on your finances.
- An unanticipated illness could deplete your Health savings account (HSA) balance.
- People who have HDHPs may avoid seeking necessary medical care.
- The funds can only be used for medical expenses that are tax-free. If you use your Health savings account (HSA) funds for anything else, you will be taxed.
How to Determine Whether an HSA Is Right for You
HSAs are an excellent choice for healthy people looking for both a savings opportunity and a health insurance plan. If you were thinking about starting a savings plan like a 401(k) or an IRA, an HSA might be a better option.
“Funding your HSA is a no-brainer if you are eligible to make an HSA contribution and have the means,” Petrovsky explained. “If you have to choose between funding your IRA and investing in an investable HSA, the HSA is the only triple-tax-advantage account available.”
You’ll still be able to get vaccines and other preventive care, and you’ll save money if you need to see a doctor. You can examine your current budget as well as your medical expenses. If medical expenses are currently only a small portion of your budget, an HSA may be a good option.
People nearing retirement may also benefit from an HSA. Remember that if you’re over 55, you can contribute an extra $1,000 per year. You won’t be able to make new contributions once you reach Medicare eligibility, but you will be able to use your HSA funds to pay for Medicare premiums and copayments.
Health savings accounts (HSAs) are accounts that allow you to save money for medical expenses tax-free. Your contributions frequently earn interest or investment returns.
These earnings are tax-free as well. You can keep funds in your Health savings account (HSA) for as long as you want. To use an HSA, you must have a high-deductible health plan. Health savings accounts (HSAs) may be a good option for people who are generally healthy and have few medical expenses.