A Health Savings Account (HSA), like the name suggests, is a savings account to pay for your health expenses. Of course, there are rules attached and you must have a certain type of health care plan to be eligible. HSAs are available to complement High Deductible Health Plans (HDHP). They work like a personal bank account, giving you the opportunity to take money from your paycheck before it is taxed, and use it to pay for healthcare expenses, prescriptions and certain over-the-counter health products. An HSA stays with you even after you separate from your job and can also help you save for expenses during retirement. In this article, we’ll discuss all of the pertinent information along with some tips and tricks to investing in an HSA.
Advantages of a Health Savings Account
How about a “triple tax advantage”? That sounds too good to be true. However, the HSA allows you to contribute to your account tax free, grow your account earnings tax free and take the distributions from the account, you guessed it, tax free! You also have the opportunity to invest the funds in your account to let them grow even more. You can pay for your medical expenses by check or debit card and not have to worry about getting reimbursed or turning in receipts. Although, you should keep your receipts with your tax records in case of an audit.
Who is eligible for the HSA?
You may only get an HSA if you or your family have a high deductible health plan. That means, for 2021, an individual plan with a minimum annual deductible of $1,400 and $2,800 for families. Also, your plan needs to have a maximum annual out of pocket expense of $7,000 for individuals and $14,000 for families. You cannot be enrolled in Medicare or be claimed as a dependent on another person’s tax return. If you meet those qualifications, you can take advantage of the HSA.
2021 | Self-only coverage | Family coverage |
Minimum annual deductible | $1,400 | $2,800 |
Maximum annual deductible and other out-of-pocket expenses* | $7,000 | $14,000 |
HSA Contribution Limits
There are limits on how much you can contribute to your HSA. In 2021, the annual contribution an individual can make is $3,600 and $7,200 for a family. There is also “catch-up” contribution of an additional $1,000 annually for ages 55 and older.
Self-only coverage | Family coverage | |
HSA Contribution Limit for 2021 | $3,600 | $7,200 |
HSA Catch-Up Contributions for 2021 (age 55 and over) | $1,000 | $1,000 |
Breaking Down the Triple Tax Advantage
Contributions are Tax Free
You can have your HSA contributions deducted directly from your paycheck absolutely tax free. If you are self employed or your employer doesn’t offer an HSA, you can make deposits into an HSA and claim them as tax deductions when you do your taxes. Remember to check the chart for your maximum allowed contribution.
Interest and Earnings are Tax Free
Another great benefit of the HSA is your interest and earnings are also tax free. Notice I said earnings as well as interest. Once you hit your minimum HSA balance (differs by providers) you may be able to invest your funds so you can earn more than the current basic low interest rates. Be sure to check with your bank that holds your HSA for details and restrictions.
Withdrawals are Tax Free
HSA withdrawals are tax free, assuming you are using those withdrawals for qualifying medical expenses. However, if you’re under age 65 and withdraw your funds for nonqualifying expenses, you are likely to get a 20% early withdrawal penalty, on top of paying the taxes on that money. On the other hand, if you’re over the age of 65, you can withdraw the funds for any reason, you will have to pay taxes on that money but not a penalty. If you continue to use it for qualified medical expenses, there will be no taxes.
Bottom Line
The Health Savings Account is one of the best investment options out there today. If you are eligible to contribute and are financially able to do so, you should contribute every pay day. If you can max it out every year, do it, you’ll be glad you did. It is a very flexible plan that allows you to repay funds in case you mistakenly withdraw them. You can also roll your amounts over year after year and not have to worry about the “use it or lose it” rules.
Lively HSAs are fee-free for individuals and families. Sign up today and start saving for your health.
So be sure to take advantage of this great opportunity to save and grow funds tax free. These types of opportunities are few and far between. Check out Publication 969 on the IRS website for all the tax information on the HSA.
Other articles you may be interested in reading about investing and retirement:
Retirement Saving Tips To Help You Retire Better
The Benefits of a Roth IRA and How to Start Saving
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