Health savings accounts (HSA) grow more popular by the day. Right now, there are more than 30,000,000 active HSAs and 20% of Americans under 30 years of age have a membership in one. Many people are aware of how valuable HSAs are and want to take advantage of all their benefits.
An HSA can offer retirement savings, healthcare savings, and even tax savings. The tax-free money in a health savings account can be used to pay for many medical expenses, including items people use on a daily basis.
This article will delve into the benefits of health savings accounts so you can make the most of your own.
What Is a Health Savings Account?
An HSA is an account that is used in connection with a health plan. It gives employees the chance to cover certain qualified medical expenses. When money is placed in an HSA, you can use it for a doctor’s visit or other medical expenses at any time now or in the future.
When using the HSA in this manner, you will not need to pay federal taxes on the funds. State tax laws can vary but most are similar to federal regulations so there are no taxes on a local or national level.
Compared to health flexible spending accounts (FSAs), an HSA doesn’t have a clause where you have to use the funds within a certain period or the money will disappear.
As of 2023, the contribution limit for an HSA is $7,750 for a family or $3,850 for an individual. Anyone who is 55 or older can contribute an extra $1,000. Spouses who are 55 or older can also do the same but only in their own HSA.
HSAs can be used to pay all or some of your qualified medical expenses on an annual basis. The remaining funds can be used for savings and investments. If you prefer to use other funds for your medical costs, the money in an HSA can grow tax-free for future needs.
How to Take Advantage of Your HSA Account
As noted earlier, a health savings account can help you save for retirement, pay for healthcare without breaking the bank, and lower your taxes. HSAs are available only with high-deductible health plans. The funds in the account can be used to pay for out-of-pocket costs and health care expenses that the health plan does not cover.
Below are a few of the ways to make the most of your HSA account. The money stays in the account from one year to the next. Anything that wasn’t used in the past can be used in the future for qualified expenses.
Any contribution to an HSA is made before taxes. When you move money into the account, this reduces your taxable income. This may make it possible to pay less on taxes each year.
For example, as a college student, you might be in the 10% tax bracket. If you make a contribution of $25 a month, this equals $300 each year. When you calculate 10% of $300, it comes to $30. You save $30 each year on taxes.
Someone who is a young professional might be in the 15% tax bracket. If you were contributing $100 a month, that equals $1,200 for the entire year. At 15% of $1,200, you could be saving $180 on taxes on an annual basis.
Finally, let’s look at someone who is close to retirement. This individual might be in the 25% tax bracket and making a contribution of $300 each month. This calculates to $3,600 going into the HSA each year. Taking 25% of $3,600, this person would save $900 on taxes each year.
Medical Expense Savings
HSA funds can also be used to pay for your deductible, copays, and coinsurance. In addition, the money can be used for items your plan doesn’t cover, such as eyeglasses, orthodontia, and contacts. The important thing is to use the funds for eligible expenses.
If the money is spent on non-eligible expenses, you will need to pay a penalty and taxes on whatever was spent. However, if you are 65 or older, the penalty is no longer in effect.
Your HSA account can be used for retirement savings. Once you hit the age of 65, the funds can be used for anything you want. No penalties will apply. If you use the funds for eligible health care expenses, this will remain tax-free. However, you can also use the money for any other reason without the risk of extra fees.
You Remain in Control
With an HSA account, you are in control of everything related to it. That means you make the final decision about how or when you spend or save the money contained within the account. The money is yours. There is no expiration date. If you choose to switch jobs or move to another high-deductible health plan, you can take the HSA with you.
HSAs Are Investments
Another way to make use of an HSA is through investments. A portion of the balance can be used for investments in bonds, stocks, and mutual funds. However, keep in mind that you will likely need a certain account balance to take advantage of this option.
Money Works Hard for You
There are a few benefits of having an HSA and contributing to it on a regular basis.
- All unused HSA funds will roll over to the following year.
- The money sitting in the HSA account earns interest on a tax-free basis.
- HSA dollars can be used for eligible healthcare expenses, or you can invest or spend them as you desire.
Abbot Benefits Group is a small business health insurance agency that partners with companies with two to 250 employees. We can assist you in finding the lowest prices on coverage through A-rated health insurance companies. If you’d like to streamline employee benefits compliance and administration, we’re here to help. Reach out to us today for a free benefits consultation.