Any type of money you can save is an important step to painting a brighter financial picture in the future. Though many options are available as to where you can squirrel away your nuts for winter, sometimes having an account specifically designed for specific needs can go a bit further for your long-term plans.
What Is a Health Savings Account?
A health savings account, or HSA, is a type of tax-free savings account. It helps eligible individuals pay for qualified medical care. Not only do you put money before income tax into an HSA, but you can also make tax-free withdrawals — so long as you use the funds for qualified healthcare expenses.
How an HSA Can Save You Money
You have two options for an HSA. One is an employer-sponsored account, which you contribute to with pre-tax income with minimum deductibles. Your other option is an individual HSA. With this type of account, you contribute with taxable income — but your contributions are tax-deductible.
Saving money on taxes makes a big difference in the long-term execution of your financial plan. If you qualify, a health savings account could help you to offset the cost of healthcare expenses. An HSA provides a triple tax break:
- You can contribute to it with pre-tax income.
- Your savings grow tax-free.
- You can use funds for qualified medical expenses tax-free.
How An HSA Works
You contribute to your HSA through payroll deductions, making online transfers or submitting a check. To access your account, you can use an HSA debit card or a check connected to your account. You may also reimburse yourself for qualified out-of-pocket expenses using an online transfer.
In addition to the triple tax break, your contributions don’t expire. You can keep the account through retirement and use it as an extra savings account.
Who Can Get an HSA?
You must have a high-deductible health plan. HDHPs come with lower monthly premiums, but they also require that you pay more out of pocket in a plan year. The combination of HSA funds and an HDHP spending account can help you to save money on healthcare costs, especially if you are enrolled in Medicare.
HSA Key Takeaways
While you don’t need authorization from the IRS to open an HSA, there are still some rules. First, you must have an HDHP to qualify. In general, that means a health plan with a $1,400 deductible for individuals and $2,800 for families. Consider these key takeaways:
- Contribution limits and excesses
- Withdrawals and taxes
- Enroll in an HDHP
1. Contribution Limits and Excesses
Those with self-only coverage under an HDHP can contribute a maximum of $3,600 to their HSA. Those with family coverage can contribute up to $7,200. If you have an employer-sponsored account, your employer may match your contributions. Employer contributions do count toward your maximum limits.
If you contribute more than the maximum amount allowed based on your plan, the excess amount may be subject to a 6% excise tax. You may withdraw some of your excess contributions and avoid paying the excise tax if you meet specific IRS requirements.
2. Withdrawals and Taxes
When you use an HSA for qualified medical expenses, those withdrawals are tax-free. You can use the money for your medical care or the medical care of a spouse or dependent children included on your tax return.
Any withdrawals for non-qualified expenses aren’t tax-free. If you use the funds in your account for anything that doesn’t qualify, those withdrawals are subject to a 20% tax penalty. If you’re over the age of 65, though, that penalty doesn’t apply.
3. Enroll In an HDHP
Be sure to compare provider options, as different providers may have varying methods for making deposits. To establish an HSA, you need to enroll in an HDHP first — after that, you have a few options:
- Ask your bank.
- Look for HSA providers online.
- Talk to your health insurance provider.
What Are the Pros and Cons of an HSA?
As with any savings account, there are benefits and disadvantages. Here are some key pros and cons to consider when choosing your HSA.
- If you change jobs, you can take your HSA with you.
- You don’t pay taxes on the money you contribute, and you can withdraw funds tax-free for qualified medical expenses.
- Your employer can contribute to your account and your funds roll over each year.
- Your HSA can double as an extra retirement fund.
- Withdrawals for non-medical and non-qualified medical expenses are subject to a 20% tax penalty.
- Unlike flexible spending accounts, you may have to pay fees, such as maintenance fees, for your account.
- You need an eligible HDHP to qualify.
- Your contributions may not cover all of your medical expenses.
Final Take To GO
If you have an HDHP, you may still need to pay quite a bit before your insurance kicks in. An HSA can help you to offset the cost of healthcare expenses, making necessary medical care much more affordable.
According to the IRS, you cannot have any other health coverage — with few exceptions — to qualify for an HSA. You also cannot have Medicare coverage or be listed as a dependent on someone else’s tax return.
FAQHere are some quick answers to a few common questions about HSAs.
- What is an HSA and how does it work?
- An HSA is a tax-free savings account that helps eligible individuals pay for qualified medical care. You contribute to your account through payroll deductions, making online transfers or submitting a check. To access your account, you can use an HSA debit card or a check connected to your account. You may also reimburse yourself for qualified out-of-pocket expenses using an online transfer.
- What is the downside of an HSA?
- Here are some potential downsides to an HSA:
- If you withdraw funds for non-qualified purposes, withdrawals are subject to a 20% tax penalty.
- You may have to pay fees.
- You have to opt for a high deductible health plan to qualify.
- Your contributions might not be enough to cover all of your medical expenses.
- Here are some potential downsides to an HSA:
- Is an HSA a good idea?
- An HSA can be a good idea if you like the idea of a high deductible health plan – it offers tax-free healthcare savings and potential employer contributions, and your funds roll over, so you don't lose any money if you don't use it up within the tax year.
Jessica Moore contributed to the reporting for this article.