Health savings accounts are a great way to set aside money pre-tax to pay for your medical expenses. They are like personal savings accounts, but they are designated for one purpose, paying healthcare costs. Health savings accounts have many of the tax advantages of a 401K or a Roth 401K. They allow you to save money tax-deferred and take a tax-free distribution if used on qualified medical expenses.
The money you contribute to your health savings account is made with pre-tax dollars. If it is employer-sponsored, it can be taken out of your paycheck as a payroll deduction. Since it is taken out before your gross income is calculated, it is not subject to federal income taxes. In most states, it is also not subject to state income taxes.
If you make contributions with after-tax dollars, you will be able to deduct your contribution from your gross income on your tax return. This will reduce your federal tax bill.
Withdrawals from your HSA are not subject to federal taxes, as long as they are used for qualified medical expenses. However, if you withdraw funds for a non-qualified medical expense before you turn 65, you will owe taxes on the money along with a 20% penalty. After age 65, you owe the taxes but are not assessed a penalty. It is important to keep accurate records in case the IRS ever audits you.
Most HSA accounts earn a minimum interest, though the rate is low. According to Bank of America, the minimum interest rate is 0.01%
Using your HSA to pay medical expenses is easy. Most accounts offer a debit card that you can use to pay your medical expenses. Another option is to pay your medical expenses yourself and then reimburse yourself from your HSA account.
High Deductible Health Plans
Health savings accounts (HSAs) are designed to be a savings vehicle for people using high-deductible health insurance plans. You contribute money to your health savings account before taxes and then use that money to pay for qualified medical expenses. This alone is a great way to extend the value of your dollar and set aside money to pay for your health expenses, such as deductibles, copayments, coinsurance, and other expenses. Generally, you cannot use health savings account funds to pay for premiums.
You can only contribute to an HSA if you have a high deductible health plan (HDHP). High deductible health plans only pay for preventative health services until you reach the deductible. For 2021, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family. In 2022, the limit will rise to $3,650 for individuals and $7,300 for family coverage.
For 2021, the maximum out-of-pocket cost is $7,000 for an individual HDHP and $14,000 for a family HDHP.
While your deductible is high in an HDHP, your premium is usually much lower.
How Much Can You Contribute to an HSA?
If you have an HDHP in 2021, you can contribute up to $3,600 as an individual into your HSA and up to $7,200 for family coverage. HSA funds roll over from year to year if you do not use them. If you get your health insurance through your workplace and they offer an HDHP, they may also offer an HSA. If they do, keep in mind that you, not your employer or insurance company, own and control the money in an HSA.
Potential Benefits of Using an HSA
There are many potential advantages to using an HSA:
- You control how the money in your HSA is spent to pay for your healthcare costs.
- Since you control the funds, you can shop around for the best prices and stretch your healthcare dollar.
- Your employer may also contribute to your HSA. If they do, the money remains yours even if you change jobs.
- The money rolls over from year to year.
- Your investment into your HSA is tax free.
- You may earn interest on your investment.
- Withdrawals are tax free if they are for eligible medical expenses.
Once you are enrolled in Medicare, you can no longer contribute to your HSA. However, between the ages of 55 and 65, you can make catch-up contributions of up to $1,000 over the limits.
But, health savings accounts can also be used to boost your retirement savings.
HSAs as a Means to SAVE for Retirement
If you have an HSA, you can contribute the full $3,600 into it even if you do not anticipate needing it that year. And if your insurance plan permits, you could invest this money and save it to pay for healthcare expenses once you retire.
Many HSAs can be used as investment accounts. You can purchase stocks and securities, which could boost your investment. However, it is important to keep in mind that all investments come with their associated risks.
Some HSAs charge a monthly account maintenance fee. In some cases, the fee might be waived if the balance in the account is kept above a certain threshold.
There are many options for paying for your healthcare expenses. Working with a wealth manager can ensure you make the best financial decisions for yourself and your loved ones.