Healthcare can be expensive. If you have an insurance plan with a high deductible, you’ll need to pay that amount before coverage kicks in. Opening a health savings account can help you prepare for medical costs and enjoy significant tax advantages.
How Does an HSA Work?
An HSA is similar to a personal savings account, but funds in it can only be used to pay for qualified health expenses. The Internal Revenue Service allows money in an HSA to be used for a wide range of medical, dental and mental health treatments.
To open a health savings account, you must be enrolled in an insurance plan with a high deductible. You can contribute money to an HSA yourself, and your employer and others can contribute on your behalf to help you save money for health expenses. The IRS limits the total amount of money that can be contributed to an HSA each calendar year.
In most cases, contributions to an HSA are deducted from an employee’s earnings each pay period. Since payroll contributions are made with pre-tax funds, they aren’t included in gross income, which means they’re not subject to federal income taxes, or to state taxes in most cases. You can also contribute to your HSA with after-tax dollars and deduct those contributions on your tax return. Interest and dividends earned on money in an HSA are tax-free.
HSAs typically provide account holders with a debit card that makes it easy to make purchases for qualified health expenses or to pay bills by phone. Some institutions that offer HSAs charge maintenance fees or a fee for each transaction, which can reduce the amount of money available for health expenses.
If you withdraw money from an HSA and use it for qualified medical expenses, you won’t have to pay federal taxes, or state taxes in most cases. If you withdraw money and use it for non-qualified expenses before you’re 65 years old, you’ll have to pay taxes and a penalty. Once you turn 65, you will be taxed but won’t have to pay a penalty on non-qualified expenses.
If you don’t use all the money in your HSA for health expenses by the end of the year, you can roll it over to cover expenses in future years. If you change jobs or insurance plans or retire, you can take your HSA with you. As a long-term strategy, you can let money in an HSA grow over time to help you prepare for higher healthcare costs you’ll likely face in retirement.
Enjoy Tax Benefits and Peace of Mind
An unexpected illness or injury can be financially devastating. With an HSA, you can set aside money to be prepared for unanticipated medical costs, while enjoying tax advantages and the flexibility to use your savings at any time for a wide range of expenses. If you have a high-deductible insurance plan, explore the benefits of opening an HSA.
This article is intended for informational purposes only and should not be construed as professional or legal advice.