A Health Savings Account (HSA or Health Savings Account), is a practical way to save for medical expenses and reduce your tax base. But not everyone can enroll in the health insurance plan needed to open an HSA. Below we will explain how these savings accounts work and how you can benefit from them.
How to qualify for an HSA or Health Savings Account?
If you’re enrolled in a High-Deductible Health Insurance Plan (HDHP), as defined by the government, you may qualify for an HSA or Health Savings Account.
These plans are redefined each year by the IRS, which determines the minimum deductible you must have and the maximum amount a plan holder can spend. You can find those actual amounts at healthcare.gov, but note that some plans have high deductibles but do not qualify you for an HSA. Look for specific plans, identified as “HSA eligible” if you want to explore some options.
How does an HSA or Health Savings Account work?
Some employers that offer high-deductible health plans also offer HSAs or Health Savings Accounts.. If yours doesn’t, you can open a separate account as long as you have a qualifying plan.
Each year, you decide how much to contribute to your HSA account, although you can’t exceed maximums set by the government. if you have one HSA Through your job, you can set up easy automatic contributions right from payroll.
You’ll receive a debit card or checks tied to your HSA balance, and you can use the funds for eligible medical expenses. This includes deductibles, copays and coinsurance, plus other qualified medical expenses not covered by your plan. Please note that insurance premiums generally cannot be paid with HSA funds.
Unlike a flexible spending account, the balance of your savings account is renewed every year, so you never have to worry about losing your savings. Once you’re over 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for medical expenses. If you use the money for unauthorized expenses, you have to pay income tax on that amount (plus a penalty if you’re under 65).
The 3 tax advantages
One of the main benefits of Health Savings Accounts is that they have three tax advantages.
Contributions made to the HSA are before taxes (if through an employer) or tax deductible (if you opened your own). You don’t pay taxes on the account growth, and if you make withdrawals for eligible expenses, you also don’t pay taxes on those withdrawals.
Because HSA contributions don’t count toward your tax burden, you’ll be taxed as if you earned less money. Let’s say, for example, that you earn $40,000 per year. If you put $3,000 into your HSA, you will be taxed as if you earned $37,000, thus reducing your tax burden.
Another benefit of Health Savings Accounts is that the money can be invested in mutual funds, stocks, and other investment tools.. There are companies that can advise and help you, depending on your investment preferences.
If you plan to invest your HSA balance, find an HSA manager to help you invest and offer low-cost investment options.