An HSA (health savings account) allows you to save tax-free money and use it to reimburse yourself for qualified medical expenses. See IRS Publication 502 for details of eligible expenses.
Combining an HSA with a high-deductible health plan (HDHP) offers three distinct advantages, such as tax savings, medical reimbursements and providing a financial foundation to cover future healthcare costs.
What is an HSA?
An HSA is a tax-advantaged financial account that allows you to set aside and invest money pre-tax in order to pay for qualified medical expenses, such as deductibles, copayments and coinsurance premiums as well as prescription drugs or over-the-counter medicines purchased without prescriptions from pharmacy chains and certain other eligible expenses. HSA funds can also be used as premium payment under COBRA/unemployment and Medicare Part B/Part D premiums once turning 65 years old.
HSAs can be opened individually or with your employer through a financial institution offering health care FSAs. While FSAs typically act like spending accounts, your HSA balance rolls over every year without incurring additional expenses should your job or health plans change.
Most Health Savings Accounts (HSAs) come with either low or no fees, although some providers may levy monthly account or investment fees which could add up. You can find providers offering HSAs with minimal or zero fees by shopping around.
HSAs provide many advantages, but perhaps their most powerful is allowing users to pay qualified medical expenses with pre-tax dollars, saving up to 12 cents in taxes per dollar contributed into your account – something especially helpful for lower income earners.
An HSA can only be funded if you’re enrolled in a high-deductible health plan (HDHP). Your employer or insurance provider may offer such plans with HSAs attached, while many marketplace plans on and off exchanges also count HDHPs among their Bronze, Silver, or Gold plans.
Once you’ve established an HSA, it is essential that you keep track of the qualifying expenses you are using your funds to cover. Doing this will allow you to avoid the 6% excise tax that applies when withdrawals aren’t spent for eligible medical expenses; additionally, investing accounts could allow for potential interest on assets within your HSA.
How do I open an HSA?
Establishing an HSA is straightforward. Once enrolled in an eligible high deductible health plan (HDHP) and meeting other eligibility requirements, opening one is straightforward – whether online, via an agent, broker or employer-supported programs. Employers may even contribute funds towards your account saving you money on taxes!
Your account allows you to pay for qualified out-of-pocket medical expenses as they arise, such as copayments, coinsurance payments and over-the-counter medicines. Furthermore, it may be used for dental and vision premium payments that may not be covered by your health plan.
Your account balance carries forward from year to year without incurring the “use it or lose it” rule, making your HSA an invaluable long-term savings vehicle. Furthermore, its flexibility enables you to switch plans or retire while still investing your funds for healthcare costs down the line.
HSAs also allow you to contribute tax-free contributions and withdraw for qualified medical expenses without paying tax on them. Plus, HSAs come equipped with options like mutual and index funds that allow you to grow your funds over time.
Be mindful when investing your HSA funds that the investment market fluctuates; your account balance could either rise or fall depending on market movements. When making decisions for how best to manage your account, take your risk tolerance and investment goals into consideration before making decisions about how best to handle the account.
Although not required to invest your funds, doing so can make your HSA even more valuable over time. A robust HSA portfolio may even serve as an extra retirement account should the time come when you leave work benefits behind.
No matter if you’re investing or simply using your HSA to pay expenses, consulting an expert is crucial for making informed decisions about both. A financial advisor can guide your choices accordingly while many HSA providers offer free consultations as a starting point.
What are the tax benefits of an HSA?
HSAs are designed to help individuals save pretax or tax-deductible dollars for future qualified medical expenses not covered by their health insurance, like over-the-counter medication or menstrual care products – without itemizing. There’s no time limit or itemization requirements when it comes time to request reimbursement from an HSA, plus withdrawals made for qualifying expenses (which includes over-the-counter medicine or menstrual products, plus travel costs) are tax free!
Some HSAs offer the option of investing a portion of your contributions into different investment choices, which could allow you to build up funds faster and possibly cover future medical costs more easily. But not all investments are suitable for HSAs, so it is important to fully understand your account before making an investment decision.
If you use your HSA funds for non-qualifiable expenses–like food, entertainment, or clothing–instead of qualifying medical costs, regular income taxes plus a 20% penalty apply. After age 65 however, this penalty is waived and distributions from an HSA will only be taxed at your regular tax rate as long as they’re used towards qualified medical expenses.
An HSA offers many advantages to taxpayers throughout their lives, especially those changing jobs or retiring later on with lower deductible plans; you will always have access to any contributions you’ve made.
Given how beneficial HSAs can be, it’s wise to speak with your Merrill Financial Advisor in order to better utilize this tool for meeting healthcare costs and saving for retirement. In addition, legal or tax advice should also be sought from professional sources.
What are the requirements for an HSA?
To qualify for an HSA, you must possess a high-deductible health plan (HDHP). An HDHP must establish both a minimum deductible and maximum out-of-pocket costs; once these have been met, any remaining medical expenses for that year will be covered by your HDHP. In addition, no other coverage such as an FSA, Medicare or veterans administration benefits should exist simultaneously with your HDHP coverage; you also may not be claimed as dependents by another person’s tax return.
Additionally, this account must be funded with pre-tax dollars; while many employers will make contributions, the employee is ultimately responsible for funding any amount not covered by their employer. These funds can then be used for qualifying healthcare costs like doctor visits, hospital charges, deductibles, co-pays and prescription drugs; they may even be used to purchase over-the-counter medication like vitamins or supplements as long as receipts are saved.
If you own an HDHP and wish to establish an HSA, your health plan will usually provide information and forms for you to complete and submit. Once the forms have been returned to them, their administrator will begin depositing “premium pass through” payments into your account.
Bank and financial institution HSA accounts typically feature lower monthly fees and investment options, and may come equipped with debit cards to make qualifying expenses easier to cover.
Before making your decision about an HSA, it is essential to carefully assess your personal circumstances. For example, if you’re moving jobs that offer lower deductibles than an HSA could offer benefits; additionally, other savings priorities could leave little room in your budget for an additional account.
However, if you anticipate high medical expenses in the future, an HSA can be an ideal way to save for them – the money invested can then be used towards medical costs post retirement as well.
