Six Important Features of Health Savings Accounts (HSAs)
1. HSAs can provide tax advantages
When you contribute to your HSA via payroll deduction, the money you’re depositing is free of federal income taxes. In most states, it's also exempt from state income taxes and FICA taxes like social security and Medicare. Any earnings you build up within your HSA are tax-free, as are any of the withdrawals you make to pay for qualified medical expenses.
2. HSA funds can roll over from year to year
Unlike a flexible spending account, the funds in your HSA are NOT “use-it-or-lose-it.” You don’t have to spend it before the end of the year, and you can take it with you even if you change employers. This gives you the opportunity to be prepared for medical expenses today, while still building up your account into retirement.
3. HSAs can be used to pay for healthcare expenses in retirement
Once you reach retirement, you’ll be able to use what you’ve saved to pay for healthcare expenses like deductibles, coinsurance, prescriptions, dental and vision work, and more. Which leads to the next important feature…
4. HSAs can be used for general living expenses in retirement
If you end up saving more than you actually need to use, that’s ok! You'll need to pay income taxes on the funds you withdraw, but once you reach age 65 there's no penalty for using the money for non-qualified expenses. If you withdraw funds for non-qualified expenses before age 65, you’ll pay a 20% penalty and income taxes, (similar to what would happen if you make an early withdrawal from a retirement account).
5. HSAs can be used as an investment vehicle
Typically, once your funds reach a certain threshold you’ll be able to invest a portion of the funds in your account, like you do with a retirement plan. This allows you to potentially increase the funds in your account over time (on the flip side, as with any investment, you could lose money including the original principal that you invest).
6. You can only contribute to an HSA if you’re enrolled in a high deductible health plan
This last feature is especially important to note as you consider which health plan is right for you. In order to make contributions, you’ll need to be enrolled in a health plan with a deductible of at least $1,400 for individuals, or$2,800 for families. These are the 2021 limits; the IRS updates these amounts annually.
As you look at your healthcare choices, weigh the potential for out-of-pocket expenses that a higher-deductible plan can bring with the opportunity to experience lower premiums and start saving in an HSA. This seemingly-simple tool can be a powerful way to plan for tomorrow while still living for today.