As enrollment season approaches, it’s important to know all your options when it comes to the financial aspects and tax advantages of different savings accounts.
A health savings account (HSA) is a great way to save money for medical expenses – for the immediate and for the future -- and reduce your taxable income.
Read on to learn more about how this type of account works and the benefits it holds for you and your family.
What Is a Health Savings Account?
A Health Savings Account (HSA) is a tax-advantaged savings account created for people who get insurance coverage through a high-deductible health plan (HDHP). Contributions to the account are made by either an employee or employer, with contributions being capped annually. These contributions can then be used to pay for qualified medical expenses for yourself, your spouse, and dependents not covered by other plans.
However, not all health insurance plans are eligible for HSAs, so be sure to check with your employer or the administrator of your health plan before signing up.
How an HSA Works
Employers that offer high-deductible healthcare plans often have health savings accounts as an option. However, if your employer does not, you can open a separate HSA account if you also have a qualifying insurance plan. HSA Bank is a popular choice, but make sure to research other healthcare savings institutions to find the right fit for you and your family.
You can use the funds on eligible medical expenses, including deductibles, copays, and other qualified medical expenses not covered under your high-deductible health plan.
Unlike a Flexible Spending Account, your HSA balance rolls over from year to year. It never expires, so it's easy to save for health expenses -- even for healthcare expenses you foresee going into retirement. It's worth noting, though, once you are 65 years old or enrolled in Medicare coverage, you can no longer contribute to the account.
HSA Tax Advantages
One of the best features of health savings accounts is the lack of taxation. Contributions made to health savings accounts are either pre-tax or tax-deductible, and after growth are not taxed. Withdrawals for eligible expenses also go untaxed. So, if you have an HDHP and feel an HSA works best for you and your family, this is a win-win!
Another bonus is the money in your health savings account can also be invested. If you are careful not to spend it all, the balance (as mentioned above) can grow tax-free.
It's worth noting, though; if distributions from an HSA are provided for anything other than a qualified medical expense, then both income taxes and an additional 20% tax penalty will apply.
HSA Contribution Rules
Contributions made to a health savings account do not have to be used or withdrawn in the tax year. Instead, contributions are vested, meaning any unused contributions can be rolled over to next year's account. Furthermore, HSAs are portable, so they can keep their accounts with them if employees change jobs.
In 2022, the annual limit on health savings account (HSA) contributions will be $3,650 for self-only and $7,300 for family coverage. That's roughly a 1.4 percent increase from 2021, according to the IRS.
What Can I Use HSA Funds For?
You can only use funds in an HSA for qualified medical expenses. The IRS defines medical expenses as "the costs of diagnosis, cure, mitigation, treatment or prevention of disease and the cost of treatments affecting any part or function of your body." This includes things like:
- Ambulance service
- Prescription drugs
- Eye & Dental care
- Lab tests
- Hearing aids
In response to the COVID-19 pandemic, the CARES Act allows HSA funds to be used for over-the-counter medicines without a prescription and certain medical products such as:
- Cold medicines
- Cough suppressants
- Epsom salts
- And more…
An HSA is often a great choice for overall healthy individuals and for saving money for future health care. Those near retirement age may benefit from an HSA as it can offset the costs of medical care down the road. Starting an HSA at a younger age can help reduce taxes in retirement by maximizing total contributions without being subject to distributions that would incur additional income taxes.
To ensure the account is meeting your needs, make sure you are depositing funds regularly. A health savings account will only provide the benefits you are looking for if you contribute to it consistently and regularly. There are many benefits of using an HSA, so be sure to take advantage of this option if available to you!
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