Health Saving Account: Everything You Need to Know
HSA means Health Savings Account. You may see this when you're signing up for health insurance. HSA's are a useful way of saving money to use for medical expenses.4 min read
What Is a Health Savings Account?
A health savings account (HSA) is a useful way of saving money to use on medical expenses while reducing the amount of your income that can be taxed. It combines high deductible health insurance with a tax-favored savings account and helps those with qualified high-deductible health plans (HDHPs) save money on many medical expenses paid out of your pocket like doctor visits, vision and dental care, and prescriptions.
HSA: How It Works
Providers of health insurance often offer health savings accounts. If your provider does not offer it, you are able to open one at the majority of financial institutions. Sometimes employers will also offer HSA's and contributions to the account can come directly from your payroll. In some instances, companies will even contribute to employee's HSA's. To use the funds in an HSA, debit cards and checks are issued to use for medical costs that are eligible. HSA funds can be used to pay for deductibles, copay, coinsurance, and other expenses like dental, vision, and other services your insurance plan does not cover.
It's good to note that insurance premiums are not eligible to be paid with HSA funds. With a flexible spending account, on the other hand, the balance of your HSA will roll over every year. That way, you know your savings will accumulate over time and always be secure.
People over 65 years of age who are part of the Medicare program are not able to contribute to HSA's. However, the money can be used for medical costs that are paid out of your pocket. If the HSA funds are used for costs that are not eligible, income tax must be paid on the cost, and you will also incur a fine if you're under 65.
The government caps the amount people can contribute to their HSA. In 2017, the maximum for an individual is $3,400 (up from $3,350 in 2016) and $6,750 for a family. In 2018, the contribution limits will increase again from $3,400 to $3,450 for an individual and from $6,750 to $6,900 for a family. If you're 55 or older, you may give an additional $1,000 per year, known as a "catch-up" contribution, which aids you in saving for costs related to health care during retirement.
Administrators aid clients in investing the funds of their HSA. Contributions to HSA funds are tax-deductible/pre-tax, exactly the same as IRA contributions. Your HSA contributions get made prior to your incoming getting taxed, so you won't be paying taxes on the account's growth. Should you take out money for expenses that are eligible, you won't pay tax on that withdrawal. Because after making HSA contributions is when your income is taxed, you will be taxed like you don't make as much money.
Potential of Investment of HSA's
You are able to invest HSA's in stocks, mutual funds, and various different investment tools to make more money. According to Matt Irvine, vice president of Sales and Marketing at Health Savings Administrators, the HSA is the most tax-advantaged investment option for medical expenses and retirement, and there are no minimum required distributions at 70½ like other retirement accounts. He discusses that it could be even better for people to invest in an HSA instead of and IRA or a 401(k) with no matching and that if a contribution goes into HSA via payroll deduction, it is not subject to FICA. FICA, short for Federal Insurance Contributions Act, is the federal income tax that goes toward Social Security and Medicare. "That gives me 7.65% more into my HSA. My 401(k) and IRA contributions may avoid state and federal taxes, but they are subject to the FICA tax," Matt Irvine says. He says that if investing the balance of your HSA is what you want to do, the key is to find an HSA that provides first dollar investing with low cost, high performing, reputable funds and to steer clear of businesses mandating a minimum balance for investing or charging hefty fees.
Things You Need to Know About HSA's
An HSA is not the same as an FSA. High-deductible health care plans have a smaller premium per month and require a particular amount from you prior to your insurance kicking in. You are able to invest money left in the health savings account in mutual funds, very similar to a 401(k). Per the Employee Benefit Research Institute, smart users of HSAs may garner up to $360,000 after giving to an account for 40 years with a return rate of 2.5%. That jumps to $1.1 million with a 7.5% return and no withdrawals.
Ineligible for HSA
You are not eligible to open an HSA if:
- you have different health coverage that aids in paying for expenses related to health care prior to your deductible being met.
- you or your spouse has a health reimbursement arrangement (HRA) or flexible spending account (FSA).
- you also have TRICARE or Medicare.
- you can be claimed as a dependent by someone else.
- you previously utilized a Veterans Affairs hospital or medical services in the three months before opening an HSA, with the exception that it was related to disability stemming from military service.
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