A health savings account (HSA) is a savings account used in conjunction with a high-deductible health insurance policy (HDHP) that allows you to save money tax-free against medical expenses.
For those who have a high-deductible health insurance policy, health savings accounts are a great tool to save for future medical expenses that have a few other benefits, too.
Here is a quick rundown of health savings accounts facts you should know:
They have major tax advantages.
Money goes into an HSA pre-tax so you’re not paying taxes on that income. If you add more funds separately, that money that is tax-deductible. Moreover, the funds in your HSA grows tax-free and is withdrawn tax-free as long as the funds are used for qualified medical expenses.
To qualify for an HSA, you must have a high deductible high premium health care plan.
Your deductible must be a minimum of $1,300 for individual and $2,600 for a family (2016).
There are contribution limits.
You are limited to contributing $3,350 as an individual or $6,750 as a family (2016). People age 55 and older can add an additional $1,000.
You may be able to decide what happens to the funds.
Depending on which HSA you have, you can either allow the funds to sit in your HSA as FDIC-insured cash similar to a regular savings account or you may be able to invest the money in mutual funds.
They are portable.
If your employer’s HSA stinks or you leave that employer, don’t fret. You can easily take your HSA with you. You can open a personal HSA account and transfer the funds with typically low processing fees of between $25 and $50.
They are to be used toward qualified medical expenses.
Many types of medical expenses can be paid for with the HSA, including: dental, prescriptions, eyeglasses, chiropractor, specialized medical equipment, doctor office visits. The IRS’s Publication 502 has a comprehensive list of medical and dental expenses that may qualify. You can also use the HSA to pay for qualified medical expenses for your spouse or a dependent.
You can access the funds in an emergency.
Did you know that you can contribute to your HSA each year and allow the funds to grow as an investment? While the funds are growing, you can pay for your medical expenses out of pocket through your normal cash flow (Related article: A Better Way to Manage Your Cash). While you do this, keep track of your medical expenses year after year. If you ever fall on hard times and are short on cash, you can claim your previous medical expenses from the years you were contributing to your HSA and inject the cash tax-free into your cash flow. You’ll have to work with your CPA to file the proper forms, but it’s possible if necessary.
You can use the funds in retirement.
If you don’t need your HSA in retirement for medical expenses then you will be able to withdraw the funds once you are enrolled in Medicare at ordinary income tax rates, just like a traditional IRA or 401k.
Health savings accounts are a versatile tool that allows you to cover your medical expenses tax-free. Though knowing whether or not it makes the most sense to carry a high deductible health insurance policy or not depends on your unique situation and whether or not an HSA will ultimately provide more savings to you and your family in the long run.
For more information about health savings accounts, be sure to check out IRS Publication 969 for all the latest facts and figures for the current year. If you have questions about whether or not an HSA is right for you, speak with your financial advisor or CPA so they can explore health saving accounts with you in more detail on a personal level.