A Health Savings Account (HSA) is a savings account designed to help people save for medical expenses. HSAs are usually offered in conjunction with high-deductible health plans, which means that you will have a lower premium and higher deductible which allows you to put in deductible and reduce your taxable income unlike your FSA. If you are looking for a way to save on your healthcare costs while also taking advantage of some tax benefits, then an HSA might be the right option for you.
What is an HSA?
When you set up an HSA account, you will work with a financial institution like a bank or credit union to create a specific account for healthcare expenses. You will be able to deposit money into this account, and then use those funds to pay for qualified medical expenses without having to pay taxes on the money.
The reason why HSAs are often paired with high-deductible health plans is that these plans require you to pay a higher amount of your medical expenses out of pocket before your insurance coverage kicks in. This means that you can use your HSA funds to cover your deductible and other out-of-pocket expenses.
The money in your HSA account can also be invested, which means that it has the potential to earn interest or investment gains over time. This can make HSAs a smart choice for people who want to save for healthcare expenses while also building wealth over time.
The Benefits of an HSA
There are many benefits to having an HSA account, including:
- Tax benefits: One of the biggest benefits of an HSA account is that it provides a way for you to save on taxes. When you contribute to your HSA account, the money is deposited on a pre-tax basis, which means that it reduces your taxable income for that year. Additionally, the money in your HSA account can be withdrawn tax-free as long as you use it for qualified medical expenses.
- Lower healthcare costs: Because you can use HSA funds to pay for qualified medical expenses, you can reduce your overall healthcare costs. This is especially true if you have a high-deductible health plan, as an HSA can help you cover your out-of-pocket expenses up to your deductible.
- Flexibility: Unlike other healthcare savings accounts like FSAs, HSA funds roll over from year to year. This means that you can build up your savings over time and use your HSA to cover larger healthcare expenses in the future.
- Investment opportunities: HSA accounts typically offer investment options, which means that you can invest your HSA funds and potentially earn a return on your investment.
- Portability: If you change jobs or leave your employer, you can take your HSA account with you. This means that you won’t lose any of the money that you’ve saved in your account.
How to Set Up an HSA
If you think that an HSA might be right for you, here’s what you need to do:
- Enroll in a high-deductible health plan: In order to be eligible for an HSA account, you must have a high-deductible health plan. This means that your healthcare plan must have a deductible of at least $1,350 for individuals and $2,700 for families.
- Find an HSA provider: You will need to find an HSA provider to set up your account. This can be a bank, credit union, or other financial institution that offers HSA accounts.
- Contribute to your HSA: Once your account is set up, you can start contributing to your HSA. The annual contribution limit for 2021 is $3,600 for individuals and $7,200 for families. If you are over the age of 55, you can contribute an additional $1,000 per year.
- Use your HSA funds: You can use your HSA funds to pay for qualified medical expenses like deductibles, copays, and prescriptions. Keep in mind that you will need to keep receipts or other documentation of these expenses in case you are audited by the IRS.
The Bottom Line
Overall, a Health Savings Account can be an excellent way to save on your healthcare expenses while also enjoying some tax benefits. If you are considering an HSA, be sure to do your research and compare different providers to find the right account for your needs. With the right strategy, an HSA can be a valuable tool for managing your healthcare expenses and building wealth over time.
Key Takeaways
- An HSA is a savings account designed to help you save for medical expenses.
- HSAs are often paired with high-deductible health plans and offer tax benefits, lower healthcare costs, flexibility, investment opportunities, and portability
- To set up an HSA, you need to enroll in a high-deductible health plan, find an HSA provider, contribute to your HSA, and use your HSA funds for qualified medical expenses.
