Understanding the Benefits of an HSA
With the challenges posed by continuously rising healthcare costs, the need for smart financial planning and the desire for greater control of one’s healthcare choices, Health Savings Accounts have moved to the forefront of personal finance and healthcare cost discussions. They can be a strategic choice for individuals and families seeking to manage healthcare costs while saving for future medical expenses.
HSAs can be a strategic choice to help prepare for your future healthcare costs. Review the rules and see if they’re a good fit for you with your financial planner or tax advisor.
What is an HSA?
An HSA, or Health Savings Account, is a tax-advantaged financial account available to individuals in the United States who are covered by a high-deductible health plan (HDHP). The purpose of an HSA is to help individuals save money for current and future medical expenses while also offering specific tax benefits. Here's how it generally works:
Eligibility: To open and contribute to an HSA, you must be covered by a high-deductible health plan (HDHP). You cannot be covered by any other non-HDHP health plan, be enrolled in Medicare, or be claimed as a dependent on someone else's tax return.
Contributions: You can contribute pre-tax or tax-deductible funds to your HSA, up to annual limits set by the IRS. These limits can change each year. The contributions you make to the HSA are not subject to federal income tax, and in many cases, they're not subject to state income tax either.
Investment: Once the money is in your HSA, you can invest it in various financial ways, such as stocks, bonds, and mutual funds, thus allowing the account to potentially grow over time.
Withdrawals: You can withdraw money from your HSA tax-free if the funds are used for qualified medical expenses. These expenses include doctor's visits, prescription’s, medical procedures, and other health-related costs. If you withdraw funds for non-medical expenses before age 65, you'll be subject to income tax plus a 20% penalty.
Portability: HSAs are portable, meaning the account stays with you even if you change jobs or health plans. The funds in the account roll over from year to year; they don't expire.
Tax Advantages: One of the most significant advantages of an HSA is their tax-favored status. Contributions made to an HSA are tax-deductible, which can lower your taxable income for the year. You can also earn tax-free growth on investments within the account. Furthermore, withdrawals used for qualified medical expenses are entirely tax free, making HSAs a valuable tool to reduce your overall tax burden, managing healthcare costs and saving for the future.
Retirement Use: After age 65, you can use the funds in your HSA for any purpose without penalty. If used for non-medical expenses after age 65, you'll owe income tax on the withdrawal, like a traditional IRA.
HSAs can be a valuable tool for individuals who anticipate having ongoing medical expenses, want to save for healthcare costs in retirement, and can afford the higher deductible associated with a high-deductible health plan. It's important to understand the rules and regulations governing HSAs and to consult with financial and tax professionals when considering one as part of your financial strategy.