What Are the Benefits of a Health Savings Account
The health savings account (HSA) may be one of the best and most versatile accounts that people have access to. It’s an account that I’m always looking for with prospects and clients. There is a good chance I’m going to recommend maxing it out, possibly investing it, and I won’t be paid a penny on it from an asset management fee. So, keep reading below to find out why I love it and considerations you should review personally.
What is a Health Savings Account?
An HSA is a type of savings and possibly an investment account that allows you to save pre-tax dollars towards qualified medical expenses, if and only if you are covered by a high deductible health plan (HDHP). The IRS defines an HDHP if you have a deductible of $1,500 for an individual and $3,000 for a family with a max out of pocket cost of $7,500 for individuals and $15,000 for a family. Typically the premiums for an HDHP are lower than other types of plans because you’re taking on a larger (or higher) deductible. You usually have to pay a pretty large chunk towards medical before insurance will kick in and start sharing in the cost. The easy approach is to ask your HR person if you’re unsure if you're in one or your company offers one.
Why should I have an HSA?
You should have an HSA if you're enrolled in an HDHP to save towards meeting your deductible for medical related expenses. The big benefit of the HSA is the potential for triple tax savings. If you save through your paycheck, you don’t pay FICA taxes, but you do if you make contributions outside of your paycheck. There is no way to recoup this on your tax returns if you contribute outside of your paycheck. You also don’t pay federal income taxes on the amount (you can recoup on your tax return for this one). The third part of the tax free savings comes from earnings and withdrawals on the account if used for qualified medical expenses.
Your employer may even contribute money towards the HSA on your behalf, so you could be leaving free money on the table by not having one if you’re covered by an HDHP!
Where do I open an HSA?
Your employer may have an arrangement for payroll deductions with a provider, but there are plenty of choices out there from Schwab, Fidelity, or HSA Bank. You may also want to check with your primary financial institution on what they offer.
How much can I save in an HSA?
In 2023, you can have a maximum contribution of $3,850 for individuals and $7,750 for families. If you’re over age 55, you can make an additional catch up contribution of $1,000 each year. It’s important to note these are the total contribution maximums and anything your employer puts in on your behalf counts towards the limit. These limits typically change year to year due to inflation.
You can only contribute to an HSA while being covered by an HDHP. If you no longer are covered by an HDHP due to a change in your medical plan choice, company, etc., you can keep the dollars you have and continue to use towards medical expenses.
How do I use an HSA?
Many HSA providers will give you a debit card to pay for services towards your deductible, copayments and other medical expenses such as dental and vision expenses. There are several providers that have the account set-up as a checking type of account, but providers like Schwab and Fidelity allow you to invest your savings in the market. This allows the potential for your savings to grow (tax free) and withdrawal (tax free) when used for qualified medical expenses.
What happens if I don’t use all of the money I put in an HSA?
Unlike a flex savings account, the HSA is allowed to be rolled over entirely year to year. If you have a family and contribute $7,300 and use none of it during the year, you roll the entire amount over into the next year and so on and so forth.
Even in retirement, the account can be used to pay for Medicare premiums(B&D but not Medigap), long-term care expenses, and even at age 65, you could simply use it like a traditional IRA. However, I’m going to guess that most people will use it for medical related expenses in retirement given it’s estimated a couple retiring today will spend $315,000 on health care costs, excluding long term care.
Using an HSA can be an excellent way to manage your healthcare costs and save money on taxes. If you have an HDHP, it's worth considering setting up an HSA account. By contributing to an HSA, you can save money on taxes, earn interest on your savings, and have peace of mind knowing that you have money set aside for medical expenses.
Bonus content: Click the button below to download a guide to help determine if your HSA distribution will be tax free!
