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- A health savings account is a savings vehicle that lets you put aside money for health costs.
- The money rolls over from year to year with an HSA and can be used as an investment tool.
- Retirees over age 65 can use HSA money for non-health costs.
It's open enrollment season, a time when people often overlook one of the best deals around: a Health Savings Account (HSA).
They're available if you have a high-deductible health plan, which the IRS says is at least a $1,500 deductible for an individual or #3,000 for a family in 2023. From triple tax advantages to flexibility to long-term growth, HSAs offer much more than just covering current healthcare costs. Here's why you should consider one.
What is a health savings account?
The triple-tax advantage
Similar to an IRA, an HSA lets you make annual contributions and offers significant tax perks. Here are three tax advantages you should know about:
- Contributions to an HSA are federally tax-deductible, reducing your taxable income.
- Both contributions and earnings grow federal tax-free.
- Withdrawals for qualified out-of-pocket medical expenses are also tax free — whenever you take them, no matter your age. Those expenses can include deductibles, copayments, prescriptions, and necessary medical equipment as well as medical care not covered by insurance such as dental, vision, hearing, and long-term care. You can also use it to pay for medical expenses for a spouse or other dependent.
But here's the rub: If you take the money for something other than a qualified medical expense, it's a different story. In that case, you'd pay ordinary income taxes on the withdrawal and a 20% penalty if you're under 65 (after 65, you can use an HSA to cover any expense; withdrawals would be subject to ordinary income tax but not a penalty). So if you follow the rules, the tax deal can be significant.
How does an HSA work?
Your HSA rolls over year after year
A particularly useful feature of an HSA is that if you don't use it, you don't lose it, unlike a flexible savings account. The money is yours whether you need it immediately or down the road. So you don't have to spend for the sake of spending. If you don't need the money, just let it grow tax-free. Plus, an HSA is portable, so if you change employers, you can take it with you.
You're eligible for an HSA regardless of income
Unlike IRAs or Roth IRAs, there is no income limit to contribute to an HSA. This means if you're a higher wage earner, you can still take advantage of a 100% federally tax-deductible account. So an HSA can act as a supplemental IRA.
An HSA can be another way to invest for your future
An HSA can also be an investment account. If you're fortunate enough not to need the money to cover ongoing medical costs, you may be able to invest the balance in mutual funds, stocks, or ETFs (depending on what the plan offers, and typically once a minimum account balance is reached).
Time is, of course, a key factor in taking full advantage of the investment growth potential of an HSA. So depending on your age, your HSA could be a supplement to your retirement accounts or maybe even a retirement account just for healthcare when you reach those golden — yet often costly — years. (See Insider's picks for the best retirement plans.)
For 2023, contribution limits are $3,850 for an individual, $7,750 for a family. Plus, there's an extra $1,000 catch-up contribution for those 55 and over.
Before you open an HSA, do your research
To me, the benefits of HSAs generally far outweigh the negatives but, as always, do your homework. First, get the details on any high-deductible health plan you're considering. While premiums may be lower, there may be medical network requirements or restrictions.
You'll also want to check for potential fees related to an HSA account. There may be a monthly maintenance fee as well as costs related to checks or debit cards. Also be aware of potential expenses when investing your HSA dollars. Be sure to get the details from your employer or the financial institution providing the HSA.
That said, I'd definitely consider taking advantage of this benefit. It can be a win in terms of medical needs, taxes, and your long-term financial health. Sounds like a good deal to me!
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.