There is one account in the world that has the ability to provide you with three tax benefits at the same time (not just one, not just two, but three!) If you take care of it, a Health Savings Account, also known as an HSA, can save you tens of thousands of dollars in healthcare costs for years to come without you ever knowing it or doing anything.
An HSA allows you to deposit money into your account without paying taxes on the deposit, your money grows without paying taxes on the growth, and you can withdraw your money from your account to pay for qualified medical expenses without paying any taxes on your withdrawals. All of these tax-free transactions are incredibly rare in the world of personal finance.
In fact, an HSA is simply a special savings account set up to pay for medical expenses. You would put money into your HSA and later use it to pay for your medical bills and other medical-related expenses.
There is nothing complicated about opening an HSA. Some people open their account through their employer, while others open their account with a financial institution of their choice. After you have your account open, you can deposit money into your HSA at any time.
Many people make manual contributions from their traditional bank account into their HSA; other people want their HSA contributions deducted from their paycheck automatically each pay period like their retirement plan contributions.
You will accumulate money in your HSA until it is needed.
When a medical expense arises, you can either pay the bill with a debit card that is linked directly to your HSA or sometimes (like a credit card) you can initially pay out of pocket, and then reimburse yourself using that same bill when the bill is submitted to the HSA for reimbursement.
The second method of reimbursement is commonly used because it gives people the ability to keep their HSA funds invested while they wait to be reimbursed.
Here’s another interesting item: the funds in your HSA do not expire! Ifyou do not use your HSA funds during the current calendar year, the carryover amount rolls into the next calendar year. You can continue to use your HSA funds for as long as they are available, and some people may keep their HSA funds for 20 years or more.
The HSA account will remain with you after you have left an employer, and will always be considered your property.
To be eligible to use an HSA account, you must be enrolled in a high-deductible health plan, which is commonly referred to as an HDHP. A high-deductible health plan is health insurance that has relatively high out-of-pocket expenses, a high deductible, and is capable of being used to determine the initial medical expenses in an insurance plan before coverage begins.
Higher deductibles usually result in lower insurance premiums. This is considered a part of how much you have for an insurance policy and how much you pay in premiums for that policy.
There are limits on what you are able to put into your HSA account each year based on the IRS. The amounts will change from time to time, but people can always put in about $1,000 per year, while families can put in more.
HSA funds can be used for eligible medical expenses only (e.g., doctor visits, prescription medications, lab and testing services, surgery, dental services and vision costs). However, just because something is “health related” doesn’t mean that it is an “eligible expense” for HSA purposes. Procedures that are considered cosmetic, some optional procedures, or anything that is totally aesthetic is generally not considered an eligible expense for HSA purposes.
If you use HSA funds for an ineligible expense, the IRS may impose taxes and/or penalties on you for that expense. Therefore, you must always carefully check to make sure an expense is an eligible HSA expense prior to using HSA funds to pay for the expense.
The initial benefit that you get from your HSA when you make a deposit is that your HSA contributions are made with pre-tax dollars. Therefore, your HSA contributions will decrease your taxable income for the tax year.
Another benefit of an HSA is how it grows in value while sitting in an account. Unlike a traditional savings account, many HSAs let you cash in and invest the money you have in the account into mutual funds, stocks, and/or bonds. Therefore, any growth you have on your investments is tax-free.
When you take money out of an HSA for qualified medical expenses, the money you withdraw is tax-free. This mixture (tax-free in, tax-free earnings, and tax-free out) is why HSAs are generally referred to as triple tax-advantaged accounts.
For an individual who regularly receives medical services, or anticipates incurring large medical costs in the near future, purchasing a health plan with a lower deductible would generally provide the individual with better coverage sooner, thus saving the individual money in a shorter period.
Another factor to consider is an individual’s level of financial flexibility; if an individual has difficulty making ends meet or trying to pay off debt, he or she will not likely have the ability to open an HSA, since it may be difficult for him/her to put something away for medical use.
Individuals who are relatively healthy and have more disposable cash in their budgets typically reap the greatest rewards from an HSA.
Younger people who earn money regularly often have the easiest access to this option.
Should they choose to buy a high-deductible insurance policy, will put money into an HSA account, and use the funds from it to invest, this will enable them to accumulate tax-free money for future healthcare expenses, due to compounding interest.
The amount that is accumulated will increase over time. When they require access to their funds—regardless of whether they need it next year or twenty years from now—the money will be waiting for them.
An HSA is not simply another type of bank account; it is one of the more useful financial tools a person can use to manage his/her healthcare costs.
