Understanding Health Savings Accounts (HSAs)
Aging isn’t always easy, especially when it comes to medical expenses. Even the most athletic or health-conscious people can’t avoid a regular doctor’s bill or prescription costs. Unfortunately, it’s simply a fact of life—and it’s not getting any cheaper any time soon.
Health care insurance provides financial support, but there are often gaps in coverage. That’s where an HSA, or Health Savings Account, can help. Here is a rundown on how it works.
What is an HSA?
An HSA may be new to you, but you’re probably more familiar with it than you think. Most Americans have a savings account—around 70%, according to TIME partner, NextAdvisor.
Like a savings account, an HSA lets you store money in a secure place. However, an HSA is unique because it holds funds specifically for future medical expenses. You make these contributions with pre-tax dollars, and they roll over from year to year. Most health insurance companies offer these accounts, but you can open one with certain financial institutions if yours doesn’t.
Who Can Have an HSA?
The IRS determines HSA eligibility based on specific requirements. You must be covered under a High-Deductible Health Plan (HDHP), which has a deductible of at least $1,400 for individuals or $2,800 for families (according to the IRS).
To stay eligible, you cannot purchase coverage outside your HDHP. However, certain plans for specific illnesses, such as cancer insurance, are acceptable. You also lose eligibility if someone claims you as a dependent on their tax return.
What Can I Spend an HSA On?
The money in an HSA is reserved for certain dental, healthcare, and vision costs. You can also use the funds for your spouse or an eligible dependent.
Some qualified expenses include:
- Doctor visits and co-pays
- Medical equipment and supplies
- Medical imaging (MRIs, X-rays, etc.)
- Prescription medications
- At-home care services
You can also reimburse yourself for qualified expenses paid out of pocket. However, HSAs do not cover everything—cosmetic surgeries and over-the-counter items without a prescription are generally excluded.
Can I Invest an HSA?
HSAs start as cash accounts that earn interest similar to a savings account. Once you reach a certain balance, you can convert your HSA into an investment account.
The major benefit of investing through an HSA is its tax advantages:
- Tax-Free Contributions: Contributions are made pre-tax, lowering your taxable income.
- Tax-Free Growth: Funds grow tax-free over time.
- Tax-Free Withdrawals: As long as withdrawals are for qualified medical expenses, they are tax-free.
- Post-65 Withdrawals: After age 65, withdrawals for non-medical expenses are allowed but subject to regular income tax.
How Can I Spend My HSA Wisely?
There are several ways to make the most of your HSA. Many account holders use about 96% of their yearly contributions for medical costs, according to the Lively Blog. This makes HSAs a great way to reduce financial strain from medical expenses.
However, another strategy is to maximize contributions and let the funds grow tax-free for future use. This approach turns an HSA into a valuable retirement planning tool, offering financial security for later medical expenses.
Final Thoughts: An HSA is a smart way to save for medical costs while taking advantage of tax benefits. Whether using it for immediate healthcare expenses or as an investment for the future, an HSA can be a powerful financial tool.