What Is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a special type of tax-free savings account that you can use to save money for medical expenses if you’re enrolled in a qualified high deductible healthcare plan. Health Savings Accounts have many benefits and can double as a long-term savings tool if you don’t use the money in the plan for medical expenses. You’ll have to pay for any medical expenses up to your deductible amount before your insurance coverage kicks in if you have a high deductible health insurance plan. Your HSA will help you pay for the medical expenses that the insurance policy doesn’t cover. But that’s not all it can do for you.
What Are the Advantages of an HSA?
An HSA can help you pay for your medical needs in the short term, and it can help you reach your savings goals in the long term. Consider these five advantages of an HSA.
Money Goes Into Your HSA Before It’s Taxed
As with other pre-tax savings schemes like IRAs and 401(k) plans, contributions made to your HSA reduce your taxable income. For the calendar year 2022, individuals can direct $3,650 of their pre-tax income into an HSA. For families, the limit is $7,300. These thresholds increase to $3,850 and $7,750 respectively in 2023.
Interest Earnings Are Tax Free
Any earnings from investments in the account are likewise tax free.
Unused Funds Carry Over to the Following Year
Funds in your HSA are not “use it or lose it.” These accounts can grow to thousands of dollars through contributions and investments if you haven’t tapped the funds for medical expenses.
Withdrawals for Medical Expenses Are Tax Free
You can do so without incurring tax if you need to withdraw funds from your HSA to cover qualified medical expenses. But withdrawals for non-medical expenses are subject to income tax and a tax penalty (20% of the amount withdrawn).
Non-Medical Withdrawals Made at Age 65-Plus Aren’t Penalized
If you are fortunate enough to reach age 65 with a healthy HSA, you can access those funds for any use without a tax penalty. But those withdrawals must be for qualified medical expenses to be completely tax free. Non-medical distributions are taxed as regular income.
Tips for Choosing a Good HSA
Because HSA accounts are not only used to reimburse medical expenses but can also act as savings vessels for your future if you don’t use them, it is important to think of this as a type of retirement investment account.
Beware of high administrative charges or fees. Ask if the administrative fee is waived when you have a specific minimum balance. Ask if you’ll be able to manage your account online.Ask if you’ll be provided with a debit card to access your funds.Find out what the process is for withdrawals or reimbursements.Ask about the investment options for your account.
A Note About Fees
You don’t need to have a minimum balance to open and maintain an HSA, but some administrators (the bank, credit union, or insurance company that manages your HSA) may waive fees once you have reached a minimum balance. A plan with a lower minimum balance can save you a lot of money in fees when you’re just starting out with your HSA.
Where To Set Up an HSA
Starting a Health Savings Account isn’t difficult. You can set up your account with:
BanksBrokers and financial advisorsCredit unionsInsurance companies
In the end, doing a little bit of research can help you earn more money in interest, spend less in fees, and give you more control of your account.
