What's an HSA?
A Health Savings Account, known as an HSA, is an underutilized savings account that has some versatile tax benefits you may want to consider. Its purpose is to help you save & pay for qualified medical expenses, including medical, dental, vision, and prescriptions. These plans are great options for those with high-deductible health plans (more below) to cover out-of-pocket expenses.
What’s the benefits?
Three major tax benefits:
All your contributions to the HSA are tax-deductible.
Your saved HSA funds can be invested, meaning they grow tax-free.
All qualified reimbursements on a medical expense are tax-free too.
No Rollover limits - This money does not have a time limit on its usage so any unused funds will rollover to the next year.
Retirement savings - An HSA is a tool that is effective when saving for retirement alongside 401ks & IRAs, especially considering most of us will expect more medical expenses in older age. At 65, you can withdraw HSA funds for any reason, though you will need to pay state & federal taxes.
Who can have an HSA?
To have an HSA account, you must meet the following criteria:
High-Deductible Health Plan (HDHP): As of 2024, the IRS considers a health plan an HDHP if your annual deductible is over $1,600 for individuals, $3,200 for families. Most plans mention it upfront when enrolling. This is usually the biggest point for most people to consider (more info).
Not enrolled in Medicare or Medicaid: You can use any existing HSA funds you have, but cannot contribute to the HSA account. Some ACA plans are eligible to use with an HSA.
No additional coverage: You cannot have any additional health coverage outside of your HDHP. This does not typically apply to most people. This excludes vision or dental insurance (more info here).
Not a dependent: If you are claimed as a dependent on someone else’s tax return, an HSA is not available for you.
Employer-issued vs Self-Managed HSAs
Say you are eligible for an HSA & want to open one. First, check with your employer as some offer it as a benefit (some employers will even contribute, like a 401k). If your employer does not offer it, you can still open & contribute to the account (I used Fidelity while self-employed). Self-managed HSAs are nice because it gives you the flexibility to contribute funds whenever you want throughout the year, whereas funding an employer issued HSA requires a fixed amount to be taken out of each paycheck. The caveat is that an employer-issued HSA “cafeteria plan” will take your HSA contribution out pre-tax, lowering your overall taxable income. This here can save you a few hundred dollars every year on taxes by lowering your adjusted gross income (AGI).
If your employer offers an HSA, take advantage of it, especially if they match even a small amount. If not, it is still worthwhile having an HSA to cover any medical expenses you may have, now or in the future. Ideally, save at least enough to cover your annual deductible. You don’t need to have a HDHP to use your HSA funds, they are good to use anytime in your life, for both you, your spouse, or child dependents. Next week we will talk more about other plans similar to HSAs & more details of an HSA plan & strategy.
- M