The Federal government has a number of different programs to encourage individuals to put money aside for retirement, education, and health expenses. Health Savings Accounts–also known as HSAs–allow you to put money into a tax-sheltered account.
These HSAs can be used for qualified medical expenses, allowing you to set aside funds for future health needs. Read on to learn about how these savings accounts work and whether they are right for you.
How do HSAs Work?
To set-up an HSA, you must be enrolled in a HSA-eligible plan. Though they share similarities with other health plans, to be considered HSA-eligible these plans must set both a minimum deductible and a maximum amount that individuals or families can be forced to pay out-of-pocket.
Though these High-Deductible Health Plan (HDHPs) have higher deductibles, though they also charge lower monthly premiums. Once registered for an HDHP, you can set-up your HSA at a bank, credit union, or financial institution that offers these services. Many employers will set up a plan as a benefit for their workers, who can then make automatic deductions to their HSA account directly through their payroll.
You contribute a part of your pre-tax income into your HSA, which is capped at annual levels. There are both individual and family HSAs, and in 2024 the annual limits are $4,150 for individuals and $8,300 for families, respectively. Those 55 and over can make a catch-up contribution of an additional $1,000, providing further incentive to put money away for future health care-related expenses.
Whatever monies you channel towards your HSA are removed from your tax obligation. In essence, this lowers the amount of taxes you need to pay the Internal Revenue Service for the year in which the contribution was made.
You can make contributions both to your own HSA and those of a spouse or even a friend. Employers often make contributions to their employees’ HSA accounts as well. The annual limits detailed above apply, however, capping the maximum amount of contributions per year, regardless of who is making them. Unlike with 401(k) contributions, there are no vesting requirements and the HSA is entirely owned by the individual from the moment it is established.
The funds dedicated to HSAs can be invested in the stock market, allowing these monies to grow over time. There is no time limit on using the money, which will remain at your disposal for eligible health care costs until they are needed.
Assuming that the funds are used on eligible expenses, they are withdrawn and used tax-free.
What are the Benefits of an HSA?
The benefits of an HSA transpire on both sides of the equation, with tax benefits for both the savings and usage of these funds.
Any monies that you contribute to your HSA will be deducted from your taxable income, allowing you to decrease your tax obligations by the same amount in the year in which you make them. The money remains in your account until you decide to use it, unlike Flexible Savings Accounts which must either be used or lost every year (though some plans may let you carry-over a limited amount).
In addition, your money can increase beyond the amount that you have directly contributed. Because there is no time limit on the usage of these funds, the monies can grow over time due to the magic of compound interest and can be used for health costs even into retirement.
Though those registered for Medicare are not allowed to contribute new funds to their HSA, they can withdraw the accumulated amount for qualified medical uses. These monies can be withdrawn and used tax-free.
What is a Qualified Medical Expense?
A qualified medical expense consists of visits to the doctor, medicines, medical equipment, and other costs related to dental and vision. This includes acupuncture, hearing aids, ambulance costs, psychiatric treatment, and even long-term qualified care.
Medical costs for spouses and children can also qualify under your HSA. In other words, you can use the HSA to pay for medical care, equipment, or procedures for your spouse and any children who are listed as your dependents.
Who Should Set-up an HSA?
Because HSA owners need to be enrolled in an HDHP, they are best suited for younger, healthy individuals, those expecting to need high amounts of medical care in the coming year, or higher income earners who can afford the high-deductibles.
A deductible is the amount that you are on the hook for paying before your insurance company will begin to pick up the tab. For instance, if your deductible is $1,000, this is the amount you will be responsible for paying before insurance will kick-in.
In essence, having a high-deductible means that you will be forced to pay more before your insurance will begin to pick up the tab.
For young and healthy individuals, this can often make sense. They are less likely to require regular medical care, and will likely benefit from the lower monthly premiums in an HDHP. Somewhat paradoxically, those who are sick and expecting to require large amounts of medical care could also benefit from an HSA. This is because the out-of-pocket costs are capped for both individuals and families, at $8,050 and $16,100 for 2024, respectively.
High-earning families that can afford the higher deductibles could also take advantage of this health savings vehicle to put money aside for medical costs while decreasing their tax obligations.
Conclusion: HSAs and Your Health
HSAs provide tax incentives to put money aside for future health care needs to for you and for your family.
Health care costs are an important part of any budget. Making sure that you and your family are covered is part and parcel of good financial hygiene.
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