Introduction
Health Savings Accounts (HSAs) are a popular option for people who have high-deductible health plans. They combine the tax advantages of a traditional savings account with the tax-free treatment of an IRA. Unlike other forms of insurance, HSAs don’t cover all medical expenses — but they can still be a lifesaver in situations where you might need to pay hundreds or thousands of dollars out-of-pocket for even minor things like prescription drugs. So what is an HSA? Let’s look at how this relatively new type of account works and whether or not it might be right for your financial situation!
Health Savings Accounts (HSAs) are a form of tax-advantaged savings account.
A Health Savings Account (HSA) is a type of savings account that allows you to pay for current and future medical expenses on a tax-advantaged basis.
HSAs are funded with pre-tax money, which means that the contributions you make to your HSA are deducted from your taxable income. This can result in significant savings when compared to other types of health care accounts like Flexible Spending Accounts (FSAs), which allow employees to contribute post-tax dollars but then they must pay taxes as they withdraw funds from their FSA accounts.
You can contribute to your HSA if you have a high deductible health plan.
You can contribute to your HSA if you have a high deductible health plan. A high deductible health plan is one that has an annual deductible of at least $1,350 for self-only coverage or $2,700 for family coverage in 2019. An HSA is funded by employer contributions and/or employee salary deferrals (if eligible).
You’ll need to earn income in order to contribute to an HSA–income can come from wages or self-employment income. You can’t deduct the contribution on your taxes, but any investment earnings on those dollars are tax free when withdrawn later on as long as they’re used for qualified medical expenses. If not used within 60 days after being withdrawn from the account, they’ll be taxed at ordinary income rates plus 10%.
If you’re eligible for an HSA, you don’t pay any taxes on the money you put into it or the interest it earns.
For those with high deductible health plans, HSAs are an ideal way to save money for future medical expenses. They’re a form of tax-advantaged savings account, so you don’t pay any taxes on the money you put into it or the interest it earns.
That’s right: Money saved in an HSA can go toward paying for doctor visits and prescription drugs–but only if they qualify as “qualified medical expenses” under federal law (more on that later). For now, though, let’s talk about how HSAs work in general terms so we can understand what makes them different from other types of accounts like IRAs or 401ks.
Money in your account is available tax-free to pay for qualified medical expenses.
Money in your account is available tax-free to pay for qualified medical expenses. This means that you can withdraw money from the account to pay for those costs and not have to pay tax on the withdrawal.
Qualified medical expenses include:
- Health insurance deductibles and copays
- Prescription drugs (including over-the-counter medications)
You don’t need to use pre-tax dollars when paying HSAs — they’re just like any other savings account, but with more perks!
You don’t need to use pre-tax dollars when paying HSAs — they’re just like any other savings account, but with more perks! You can use HSA funds to pay for anything you want: prescriptions, co-pays and deductibles, dental care (including orthodontics), vision care (glasses or contacts) and even over-the-counter drugs (as long as they aren’t prescription).
If your employer offers a high deductible health plan (HDHP), then you might be eligible for an HSA. The HDHP has higher monthly premiums than other types of coverage but lower out-of-pocket costs in case something happens while covered under the policy. In order to qualify for an HSA with this type of coverage plan, your annual deductible must be at least $1,350 per person or $2,700 per family; the maximum out-of-pocket cost cannot exceed $6,650 per person or $13,300 per family.*
HSAs are a great tool for saving for health care expenses and building wealth.
HSAs are a great tool for saving for health care expenses and building wealth. They can be used to pay for medical expenses, or they can be invested in the same way that you would invest in other types of savings accounts. As long as you have an HSA-qualified high deductible health plan (HDHP), you can contribute up to $6,900 per year in pre-tax dollars into your account. In addition, if you’re over 55 years old when you open an HSA, there are no income limitations on how much more money you can put into it each year–which means that people who have been contributing consistently since they opened their account could potentially save hundreds of thousands or even millions of dollars over time!
