How to save money with an HSA
A Health Savings Account, HSA, is an account that can be opened by individuals who are under high-deductible health plans. The basis of the account is that it has tax advantages and allows individuals to save for certain medical expenses. Furthermore, you can invest money that is saved in an HSA to obtain a larger return on your contribution. Contributions into your HSA can come from you, your employer, relatives, or anyone else. However, there are limits on contributions which vary year to year. In 2021, the limit was $3,600 for individuals and $7,200 for families. In 2022 the limit has risen to $3,650 for individuals and $7,300 for families.
What are the benefits of HSA’s?
- There are tax benefits
- Any withdrawals from an HSA that are used to pay for qualified medical expenses, are free of income taxes
- Tax liabilities are lowered as contributions to an HSA come out of your paycheck before income tax
- Money in an HSA that is unspent by the end of the year can be rolled over into future health expenses.
- Money in your HSA earns tax-free interest
- You can use your HSA to save for retirement. When you turn 65, the funds can be used for any purpose without a penalty, yet you must pay taxes on the amount used.
- HSAs are portable, meaning the money in your account remains available despite changes in your health insurance plan, change in employer, or even if you decide to retire.
What are the downsides of HSA’s?
- You must pay a 20% penalty, as well as income tax if you withdraw funds from your HSA for non-qualified expenses before you turn 65.
- You must have a high-deductible health plan to open an HSA, which isn’t always the best insurance option for certain individuals who are expecting to have large healthcare expenses in the future.
What medical expenses are covered in an HSA?
Some of the medical expenses covered in an HSA include:
- General medical expenses
- Lab fees
- Prescriptions and some over-the-counter medication
- Dental expenses
- Vision care
- Psychiatric treatments
A comprehensive list published by the Internal Revenue Service for the 2021 tax year can be found here. It is important to note that if you accidentally use your HSA to pay for non-qualified medical expenses or anything else, the amount used is subject to income tax and an additional 20% tax penalty.
For further information on HSA’s, speak to your financial advisor. Click here for a comprehensive video explaining HSAs further.