A health savings account helps cushion the costs of high deductible health insurance plans. The accounts have lots of other features that can help you manage your financial future — if you can cover deductibles of at least $1,400 per person and $2,800 per family. Otherwise, you are not eligible for an HSA.
The accounts themselves are a little mysterious. In some ways, they are more like retirement accounts than the “use it or lose it” flexible spending accounts that many employers offer. A recent story in NerdWallet looked at HSAs in depth. While there are certainly ways to use an HSA that favor people with high incomes, there are plenty of benefits to middle-class folks who know how to harness them.
The benefits stem from the fact that the HSA is a triple tax shield, even better than a retirement account. Contributions to an HSA are tax deductible, whether or not you itemize deductions. Investment earnings on your account are tax free, and so are withdrawals — as long as you use the money for qualified medical expenses.
The contribution limits are generous. In 2021, individual taxpayers can contribute up to $3,600 to an HSA, compared to just $2750 allowed in flexible spending accounts. The family limit is even higher, at $7,200, and people age 55 or older can contribute an additional $1,000 per year as a catch-up contribution. Because the money does not have to be spent in the year you contribute it, it can be invested so that it grows over time. Once you turn 65, you can withdraw the money for any reason, without penalty, although you’ll pay income tax on those distributions.
The downside is that HSA accounts often come with low returns and high administrative fees. Still, most users come out way ahead by using one.
If you are eligible for an HSA, take the time to set one up. It will pay off for you this year and into the future.
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