If you want to save for medical expenses and reduce your taxable income at the same time, opening a health savings account (HSA) is a great option. However, it may not be the right one for you, depending on your situation and your insurance policy.
Let’s take a closer look at how the HSA works and the pros and cons of opening one.
Is A Health Savings Account Right For You?
What is a Health Savings Account (HSA)?
An HSA is a savings account that you can only use to pay for qualified medical expenses. The money you deposit in an HSA is not taxable and you control the funds, not your insurance company.
If you are enrolled in a High Deductible Health Plan (HDHP), you are eligible to open an HSA. An HDHP is an insurance policy with a higher deductible than normal.
Your premium may be low, but you will have to pay a hefty deductible before your insurance company pays for anything. According to the IRS, individuals with a $ 1,400 deductible and families with a $ 2,800 deductible qualify as HDHP.
If you are a healthy person with few medical expenses, an HDHP may be a good option for you. HSAs can also be a good option for retirees to help offset some of the medical costs.
What are the tax advantages?
Here are the three tax benefits You will receive for opening an HSA:
- The money you contribute is not subject to federal income taxes.
- Any interest you earn from the HSA is not subject to federal income taxes.
- The money you withdraw is not subject to federal income tax, assuming the purchase is for a qualified medical expense.
Pros and cons
Like everything, there are pros and cons to using an HSA. Let’s look at some of the most important pros and cons below.
- More control: One of the biggest advantages of an HSA is that you have more control over your medical expenses. You own the account and can decide how the money is spent. And if you don’t spend it all before the end of the year, it automatically rolls over to the next year.
- Employer contributions: Your employer can contribute to your HSA as part of your employee benefits package.
- Without taxation: Any money you put into your HSA is tax free. And if you earn interest on your HSA money, you’re also tax-free. And if you use the funds for qualified medical expenses, your withdrawals are tax-free, too.
- Convenient: The money you deposit in your HSA is easy to access and use. Most insurance companies will issue you a debit card so that you can pay any necessary expenses right away.
- Investment opportunities: Also, the money that goes into your HSA can be invested in mutual funds or other investment vehicles. But if you plan to do this, you will need to find an HSA custodian to manage your investments.
- High deductible: To qualify for an HSA, you must accept an insurance plan with a high deductible. For a family of four, paying $ 2,800 or more out of pocket for a necessary medical procedure can feel very out of reach.
- Taxes: If you use the money in your HSA for unqualified expenses, you will have to pay taxes on it.
- Possible rates: Some HSAs charge a monthly maintenance fee or a transaction fee. This fee will likely offset any interest you earn on the account. You may be able to get a waiver of the fee if you can maintain a minimum balance in your account.
What to do when you have debt and can’t afford health coverage
When you use your HSA funds, you should ensure that you use them only for qualified medical purchases. Otherwise, you will have to pay federal taxes on your retirement.
However, the regulations governing these accounts are frequently updated, making it difficult to know what is considered a qualifying expense. This list is not exhaustive, but it can serve as a guide to get you started.
Here are some of the IRS Qualified Expenses:
- Natality control
- Blood Sugar Test Kits
- Dental treatments
- Drug prescriptions
- Flu shots
- Physical therapy
- Over-the-counter (OTC) medications
- Eye exams
However, if an item is not listed as a qualified expense by the IRS, you may be able to get approval with a letter of medical necessity. For example, weight loss programs, cardiopulmonary resuscitation programs, or special home equipment may be eligible with a letter of medical necessity.
How do I start?
If you are interested in opening an HSA, you can do so through your employer or a financial institution. However, there are a few things to keep in mind.
First, HSAs are only available to people under the age of 65. Once you are enrolled in Medicare, you will no longer be able to make contributions to your HSA.
Also, the IRS places limits on the amount of money you can contribute each year. Individuals can contribute up to $ 3,600 per year and families can contribute up to $ 7,200 per year. If you are between the ages of 55 and 65, you can make additional recovery contributions of $ 1,000 per year.
The bottom line
If you are enrolled in an HDHP, you automatically qualify for an HSA. HSAs can be a great option, thanks to the tax benefits, and they can give you more control over your health care.
Have you ever used an HSA? If so, how was your experience? Let me know in the comments!