HSA explained, and why you should open one ASAP
HSAs explained, and why you should open one ASAP!
If you’re like most people, the term HSA – or Health Savings Account – might not mean much to you. But if you’re looking for a way to save on healthcare costs, an HSA could be a great option for you. In this post, we’ll explain what HSAs are and how they work, as well as why we think opening one ASAP is a smart idea. Trust us – once you understand how these tax-advantaged accounts can help you save money, you’ll be eager to open one up! Read on to learn more.
What is an HSA
A HSA, aka a health savings account, is a savings account that lets you set aside pretax money for medical costs. It’s handy to save for health care expenses and reduce your taxable income.
But not everyone can — or should — sign up for the kind of health insurance plan required to use an HSA. Here’s how HSAs work and how they can benefit you.
Who Qualifies for an HSA
In order to enroll, you must first be enrolled in a high-deductible health plan (HDHP) as defined by the IRS. The minimum deductible and maximum out-of-pocket spending amounts for HDHPs are redefined each year by the IRS.
For example, in 2022, an individual HDHP must have a deductible of $1,400 or more with maximum out-of-pocket spending no exceeding $7,050. A family HDHP must have at least $2,800 deductible with total family out-of-pocket expenditures not going above $14,300 for the year.
How an HSA works
If you work for a company, check with your employer to see if they offer health savings accounts. If your employer doesn’t offer an HSA plan, you can still open one as long as you have a qualifying health care plan. You get to decide how much money to contribute each year, but it cannot exceed the government-mandated maximum. For self-only coverage, the 2022 max is $3,650 per person and for family coverage plans, the max is $7,300 total.
You can have automatic HSA contributions taken directly out of your paycheck if your workplace offers this benefit. You will be given a debit card or checks associated with your HSA balance that you can use on qualified medical expenses. Your HSA rolls over from year to year, so you never have to worry about losing your money.
Once you’re over age 65 and enrolled in Medicare, you can no longer contribute to a Health Savings Account (HSA), but still use the money for out-of-pocket medical expenses. However, if you use the money on non-eligible expenses at any point, you’ll have to pay income tax on that amount plus a 20% penalty if you’re under 65 when accessed.
What can I spend HSA funds on?
Your HSA account can be used to cover a number of out-of-pocket costs, including deductibles, copayments, and coinsurance. Additionally, you can use your HSA funds to purchase over-the-counter drugs and feminine hygiene products not covered by your insurance plan.
Advantages of HSAs
HSAs have notable tax benefits you should take advantage of.
HSA Contributions are tax-free
HSA contributions are either pretax or tax-deductible. In other words, for every dollar you save in your HSA account, that’s one less dollar you’ll be taxed on come tax season. By utilizing this tool, you can significantly reduce your annual taxable income. For example: if you make $40,000 per year and put $3,000 in your HSA account ahead of time, when it comes time to do your taxes next year -the IRS will only act as though you made 37k last year instead of 40k.
HSA account growth is tax-free
HSA funds can be invested in various ways, like stocks, mutual funds and other assets. If you want to invest your HSA money, look for a custodian that lets you do this and has low fees associated with it.
Withdrawals are tax-free
As long as you use your account money for eligible medical expenses, you’ll pay no taxes on withdrawals.
Your employer can contribute
An employer may choose to contribute funds toward eligible employees’ accounts, similar to a 401(k) plan. However, this money usually requires no matching employee contribution unlike a 401(k). Approximately 82% of employers offer this benefit, which counts toward employees’ yearly contribution cap.
Where can I contribute to an HSA?
If you work for a company, check your benefits portal or with HR to see if your employer offers an HSA option. If you’re self-employed, or your employer does not offer an HSA, there are tons of free or low-cost options available through brokerages like Fidelity.
Health Savings Accounts are an amazing way to save money on healthcare and build up a nest egg for the future. If you have the opportunity to open an HSA, we highly recommend doing so ASAP! The sooner you start saving, the better off you’ll be in the long run.
Want to learn more about setting up your financial future? Check out our Retirement Savings Guide.
This post is not financial advice and should be used for educational purposes only. Things you buy through our links may earn us a small commission.