A Health Savings Account (HSA) is a tool you can use to save money on medical expenses. Read on to learn how these accounts work, how much you can contribute, what counts as an eligible expense, and more.
HSAs are tax-advantaged savings accounts that help individuals and families pay for expenses associated with high-deductible health insurance plans. With an HSA, you can put aside tax-free money to help pay for deductibles, copays, coinsurance, and other qualified medical expenses.
To qualify for a Health Savings Account in 2020, you need a health insurance policy with a minimum deductible of $2,800 for family coverage or $1,400 for individual coverage.
While HSAs provide a smart, tax-free way to save for medical expenses, there are limitations to how much you can save each year:
All contributions are 100% tax-deductible from your gross income. To get the most from your plan, however, it helps to follow these guidelines:
You can use your HSA savings to pay for all sorts of medical expenses, from acupuncture and ambulance trips to orthodontics and vision exams.
The IRS provides a comprehensive list of eligible expenses. Read over this list to better understand how you can leverage your HSA to pay for out-of-pocket costs.
If you are familiar with FSAs, you may be in the habit of estimating your annual healthcare costs and contributing only that amount for your immediate needs. This makes sense for FSAs since you have to use your funds on eligible services before the end of the year to avoid forfeiting that money.
Since HSAs don't expire, you can carry your balance forward. It’s best to contribute more to your HSA than you think you will actually need in the near-term. This allows you to invest funds and capitalize on the tax-free growth.
It can help to think of your HSA as another valuable retirement savings tool. The larger your balance, the better equipped you will be to pay for healthcare as a senior.
When you have money saved up in an HSA, you may be tempted to withdraw from that account each time you have medical bills. If you can avoid using your HSA for every medical expense, you can continue to invest money and grow your tax-free balance when you may need it later .
Just as IRAs and 401(k)s offer catch-up contributions, HSAs allow for higher yearly contribution limits for older workers. If you're 55 or older, remember that you can contribute an extra $1,000 a year on top of current limits.