savings-investing

What is a health savings account?

The average cost of healthcare continues to rise much faster than the average wage (5%-7% per year vs. 2%-4%). To achieve and maintain financial security, you have to factor these costs into your savings. A Health Savings Account (HSA) can help you do that.

What is an HSA?

Simply put, an HSA is a savings or investment account into which you contribute pre-tax money to pay for qualified medical expenses. Since your contributions are pre-tax, you could save up to 30% (depending on your tax bracket) on costs such as deductibles, copays and prescriptions. If you’re under the age of 65, you must use your HSA money on qualified medical expenses (as determined by the IRS), but once you turn 65, you can use your money on whatever you want (just like a traditional retirement account). 

Eligibility requirements

In order to be eligible to deposit money into an HSA, you must meet the following requirements:

  • You’re enrolled in a High Deductible Health Plan (HDHP) which means you have a deductible of at least $1,400 for an individual plan and $2,800 for a family. Your out-of-pocket max can’t exceed $7,050 for individuals and $14,100 for families. 
  • An HDHP must be your only insurance (so no supplemental coverage from a spouse).
  • You must not be claimed as a “dependent” on someone else’s tax returns.
  • You must not be on Medicare.
HSA contributions: What you need to know

In 2022, individuals can contribute up to $3,650 and families up to $7,300. HSA participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution. 

Other important information regarding HSA contributions includes:

  • Your HSA contribution limit is based on the type of HDHP you purchased. So if you, as an individual, signed up for an HDHP and your family is covered under a different insurance policy, you’re constrained by the individual annual contribution limit.  
  • Annual contribution limits include any money your employer has deposited into your account that year.
  • HSA balances roll over from year-to-year which allows you to save for retirement or that rainy day.
  • Annual contribution limits do not include any rollovers from the previous years.
  • HSA contributions earn interest and can be invested if you have the right kind of HSA.
  • As long as you have an HDHP, you can open an HSA, regardless of whether your employer offers this benefit. So they’re available to the freelancers and self-employed in addition to those who’re considered “employees”.
  • While you can only contribute to your HSA while you have an HDHP, you always have access to previously made contributions regardless of the kind of insurance you have. 
  • You can use your HSA for you, your spouse and any dependents, regardless of the type of insurance you have.
  • If you use your HSA deposits for qualified medical expenses, that money is always tax-free. If you’re under the age of 65 and use your HSA for something that isn’t a qualified medical expense, you’ll pay income taxes on the withdrawn amount in addition to a 20% penalty. If you’re over the age of 65, and use your HSA for something other than a qualified medical expense, you’ll pay the appropriate income tax on teh withdrawn amount. 
Invest your HSA Funds

Individuals are allowed to invest the money in their HSA accounts in mutual funds, etfs, and stocks. The gains aren’t taxable if they are used to pay for qualified medical expenses, which is another amazing benefit. But you have to have the right kind of HSA in order to invest your savings. If you have an HSA or are considering opening an account, ask the administrator if it supports contribution investment.

An HSA is not the same as an FSA

An FSA (Flexible Spending Account) and an HSA are similar in that you can deposit pre-tax money to pay for medical expenses. But they have a few notable differences:

  • To open an FSA it must be offered by your employer.
  • FSAs operate on a use-it-or-lose-it policy. Meaning your employer absorbs any unused funds that remain at the end of the year. Your employer can choose to offer you a 2 ½ month grace period in which to use your remaining funds, or to allow up to a $500 rollover (but not both), but they’re not required to. 

 

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