The popularity of Health Savings Accounts (HSAs) might not be a big surprise when you consider how a savings account can provide peace of mind when unexpected needs arise. HSAs can not only help cover unexpected medical bills—but you can also use them to make ordinary health expenses (like your contacts, glasses, or everyday prescriptions) more affordable. Here’s how you can use an HSA to help with both short- and long-term wealth and health.
Not your average savings account
An HSA is a savings account designed to help people with high-deductible healthcare plans cover health-related costs. Similar to a 401(k), each pay period, you can contribute pretax income toward an HSA. Sometimes, employers even match or pad these contributions as part of their benefits package.
With an HSA, you’ll have a debit card that you can use for qualified health-related costs, such as a copay at a dentist or doctor’s office, new eyeglasses, or medications. While there is a maximum amount you can contribute each year, there isn’t a cutoff date for using the funds (unlike FSAs—a similar but less popular tool). So even if you don't use all your HSA funds in a given year, they roll over into the next year—and you never lose any of it.
These perks are just a few of the benefits of opening an HSA. Others include:
- The triple tax advantage: 1. HSA contributions are tax-free. 2. Your account interest gains are tax-free. 3. Withdrawals for qualified medical expenses are tax-free, too (unlike other traditional tax-advantaged accounts, like a 401(k), where you have to pay taxes on withdrawals).
- ·Can be used for anything in retirement: Since HSA funds don’t expire, you can use the money well into your retirement. In fact, once you hit retirement age, they can be used for anything (although withdrawals for non-medical expenses will be classified as taxable income). So an HSA can help ensure that even if you’re on a fixed limited income in your later years, you’ll have the funds needed to cover your expenses.
Top HSA questions, answered
Ready to hop on the HSA wagon? Here are answers to some of the most common questions about HSAs.
- How do I open an HSA? You can probably open an HSA with your current bank, but as with most financial tools, it may pay to shop around some—the interest rates may vary. When you’re ready to open it, most banks allow you to complete the process online in only a few minutes, but they may request an initial deposit or additional verification steps. Another option: If your employer offers an HSA benefit, you could reach out to your human resources department for help setting yours up.
- Who qualifies for an HSA? To qualify for an HSA, you must be enrolled in a high-deductible healthcare plan, with an individual deductible of at least $1,400 and a family deductible of at least $2,800.
- What can I use my HSA for? The IRS stipulates that HSA funds should be spent on “qualified medical expenses”—this includes deductibles, dental and vision care, prescriptions, and long-term care, to name a few. Check out a list of eligible expenses at irs.gov.1
- Why do I need an HSA if I have health insurance? Everyone’s health costs are different, but if you have high-deductible insurance, you’ll likely incur out-of-pocket costs along the way. An HSA provides a tax-free option to help make such occasions less expensive.
- How much can I contribute to an HSA? The IRS occasionally changes contribution limits, but currently, you can contribute up to $3,850 as an individual or $7,750 as a family each year.2
Tips for taking your HSA to the next level
Just having an HSA can be a powerful money tool, but there are a few things you can do to get the most out of your account, including:
- Maxing out your employer’s match: Some companies will match your contribution up to a specific amount. Take advantage of such programs, and contribute the maximum amount allowed.
- Only using it for qualified expenses: Failure to adhere to the rule may result in the item getting taxed and an additional 20% tax penalty.
- Assigning a beneficiary: Ensure someone can access the funds in the event of your passing to prevent potential delays and discrepancies.
- Playing the long game: Contribute the maximum amount you can to your HSA—even if it’s more than your estimated medical expenses for the year. By the time you retire, those tax-free interest or other investment gains on your extra deposits could add up to a lot.
There’s no doubt that HSAs can benefit both your health and wealth now and later in life. It’s easy to set up and get started—so pretty soon, you can start saving on medical expenses, and for your future.