5 Things You Need To Know About Your HSA

Origin of the HSA

Created by lawmakers in 2003, nearly 22 million Americans had an HSA by 2020, with balances in the accounts totaling more than $60 billion, according to America’s Health Insurance Plan, a trade association for health insurance providers.

How HSAs are Funded

Health Savings Accounts are funded in two ways: either by your employer or by you (and often by both). As with retirement accounts, employer-sponsored plans are often funded with funds zapped pre-tax from your paycheck.

Here are five things you need to know about your HSA:

Why an HSA?

Historically, healthcare is one of the largest expenses you’ll face in retirement. Having a bucket of money set aside specifically for these expenses can offer protection for your other assets, which means you won’t have to draw from an IRA or 401(k) to pay for a medical emergency.

• Tax Advantages. What’s even better is that using money tucked away in an HSA for health-related expenses is totally tax-free. Plus, the money isn’t a “use it or lose it” proposition. This means, what you don’t spend from one year to the next stays in the account.
• Limits. Due to its tax favorability, the IRS imposes a maximum annual contribution for both individual policies and family policies. Plus, if you are 55 or older, you can make an additional catch-up contribution of an extra $1,000 each year.
• Invest Your HSA Funds. You can also invest money in an HSA in different investments including mutual funds, CDs, bonds, or stocks, though not all HSAs offer investment options (and there may be a minimum balance requirement before you can turn the investment option on). The funds that you invest grow tax-free.

More Money for Retirement

If you end up not spending all the money in your HSA for healthcare expenses during your working years, it can serve as a supplemental retirement account. Once you reach 65, you can spend HSA funds on non-medical expenses without penalty; those withdrawals will be treated similarly to 401(k) withdrawals tax-wise and taxed at your current income tax rate.

Triple Tax-Free Benefit Explained

With HSAs, taxes are not taken out of the money placed into the account, meaning, you get a tax deduction for putting it there. The money in the account grows tax-free. And when you take money out, as long as it’s used to pay for medical expenses, you don’t have to pay taxes on it. Ever.

If you use money from the savings account for day-to-day medical expenses, it can save you about 25% off the medical expenses because of the tax advantages.

Save Your Receipts

Another advantage of an HSA account is this: You can save your medical receipts for the healthcare expenses you’ve paid for out of pocket through the years, then reimburse yourself from the HSA without having to pay taxes on the money. Your money can be invested for growth in the interim. It’s a wise way to put some cash back in your pocket while taking advantage of the tax benefits.

HSAs Cover Braces and Much More

Money in your HSA can also be used to cover procedures that aren’t typically covered by traditional insurance plans. It can also cover medical expenses for your spouse or any dependents you might have. That means you can use HSA funds to pay for braces to straighten your children’s teeth and tons of other items including dozens of over-the-counter medications.

With reporting by Casandra Andrews