Health Savings Account (HSA)
What Is a Health Savings Account?
A health savings account, or HSA, is a type of savings account designed specifically for medical expenses. You can put money aside each month to pay for routine and emergency medical services as needed. Since these accounts aren't taxed, they make it possible to reduce your healthcare costs.
How Do Health Savings Accounts Work?
Every year, you have the ability to contribute a certain amount of money to your HSA, but it can't exceed the amount set by the government. You're not allowed to exceed a maximum funding of $3,400 for a single account or $6,750 for a family account as of 2017. If you're 55 or older, you're able to contribute an additional $1,000 to your HSA. While the amounts may change from year to year, they don't vary by more than a few hundred dollars.
Once your HSA is set up, you will be issued checks or a debit card that allows you to access your funds. These funds can be used to pay various medical expenses including co-payments, deductibles, and other expenses that aren't covered by your health insurance. However, in most cases, your insurance premiums cannot be paid with from funds from your HSA.
Health Savings Account Rules
You can open an HSA at a bank or a financial institution, or set one up with an insurance company. Additionally, many employers allow you to set up an HSA through your company. However, for you to be able to take advantage of an HSA, you have to be eligible.
As of 2017, you must be enrolled in a high-deductible health insurance plan. These types of plans require a deductible of a minimum of $1,300 for individual plans and a minimum deductible of $2,600 for family plans.
What a Health Savings Account Covers
An HSA covers services intended to diagnose, cure, treat, or prevent disease or illness. Doctor visits, medical testing, surgeries and other treatments are among the covered services, as is transportation for healthcare purposes. Cosmetic procedures are not covered.
Can You Earn Interest on a Health Savings Account?
As long as you maintain a minimum balance of $1,000, you can earn tax-free interest by investing a portion of your balance in stocks, mutual funds, or other similar assets.
What Happens if You Don't Use the Money?
Unlike flexible spending accounts where you have to use all of your funds each year or lose them, your HSA account funds roll over to the next year. If you don't use the funds, you can continue adding to them. Furthermore, you can withdraw the money for personal reasons at any time, but the money will be taxed at that point.
Benefits of a Health Savings Account
There are numerous benefits to a health savings account, from the triple tax advantage (more on that later) to the retirement savings potential. It’s a good idea to explore your options when it comes to opening an HSA, and see if you can take advantage of these benefits.
Are Health Savings Accounts Taxed?
Health savings accounts are never taxed when the funds are saved or used for medical purposes. Taxes only incur if the money is withdrawn from the account for non-medical purposes.
Health Savings Account as a Retirement Fund
HSAs offer a triple tax advantage not unlike a 401(k). In other words, your account balance, medical withdrawals, and contributions are all tax-free. By making the maximum contribution each year, you can establish a firm nest egg for retirement. Just remember to cash out before you turn 65. Once you're 65 and on Medicare, you are no longer allowed to contribute.