When it comes to government entities and programs, acronyms rule the day. From the AAPC to the ZIP, there seems to be an acronym that extends to just about everything. While not nearly as exciting as say, the FBI nor as creative as the NEA, an HSA may be a very useful device for many Americans.
What Is an HSA?
A Health Savings Account (HSA) allows consumers with high-deductible health plans to save money to pay for medical expenses. HSAs have been around since 2003 yet many consumers don’t fully understand their benefits or know how to use an HSA.
Not sure if you qualify? The IRS defines a high-deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. If your total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) are greater than $6,650 for an individual or $13,300 for a family, then you qualify.
This means you can contribute up to $3,500 to an HSA for yourself and up to $7,000 for your family, according to IRS rules . If you don’t spend all the money in your account, it will roll over to the next year. Your HSA funds grow tax-free and you can take money out of these accounts at anytime, without penalty or taxes, to pay for medical expenses.
While the money in these tax-free accounts is used to pay for medical and dental expenses, the account can provide additional benefits, like helping you add to your savings for emergencies and retirement. There are also reasons why an HSA might not be right for you.
If you are thinking about, or already have, an HSA, here are five tips for using it.
1. Reducing the Amount of Taxes You Owe
Contributions to your HSA are tax-deductible so, similar to your 401(k) contributions, they reduce the amount of federal income taxes you owe.
If you’re looking for a way to lower your tax bill, consider putting the maximum contribution into your HSA. You have until the annual tax-filing deadline to make a contribution for the previous tax year.
2. Paying for All Sorts of Medical Expenses
Many consumers don’t realize all the medical and dental services that qualify for reimbursement using an HSA. Beyond dental bills and medical bills, your HSA can be used to pay for some vision-correction surgery, smoking cessation programs, fertility treatments, acupuncture, and more.
The account can also be used to pay for prescription drugs, eyeglasses, and other medical items.
Even if you switch jobs, your HSA still belongs to you. Typically, you have 60 days from when you change employers to deposit your savings into a new HSA account.
3. An HSA Can Be Used Like an Emergency Fund
Consider waiting until you really need the money before you reimburse yourself from your HSA, since there is no deadline for spending the money in your account. Any money left over at the end of the year rolls over to the next year.
If you can afford to pay the $50 for a prescription or $200 for a new pair of glasses, just hold on to your receipts, and then, when you need some extra cash, you can submit the expenses for tax-free reimbursement.
4. Supplement Your Retirement Fund
Because HSAs allow you to save pre-tax money in an account that grows tax-free—and you aren’t taxed when you withdraw funds for medical expenses—you could think of your HSA as a power saving tool, especially since you can use the funds to pay for non-healthcare expenses after you reach the age of 65.
Those withdrawals will be taxed the same as an IRA or 401(k) withdrawal, but, until then, you are able to avoid taxes on the account while it earns interest.
If you have already maxed out your annual 401(k) contributions, an HSA is an easy way to save more tax-free money for your retirement. Just make sure that contributing to an HSA doesn’t prevent you from reaching your other financial goals, such as saving for a house or starting a family.
5. Considering Your HSA an Investment
If you’re generally healthy and don’t anticipate any expensive medical or dental procedures, you may want to think of the money in your HSA as an investment.
The money will still be available in a year, five years, or even 30 years from now, and during that time it will earn interest. And, if you have more than $1,000 in your HSA, some accounts allow you to invest that money in mutual funds. Some HSA providers even allow you to invest in stocks.
If you decide to invest some of your HSA money, just be sure you have enough money in the account to pay for any medical or dental expenses that you wouldn’t be able to pay for out of pocket.
Talking to an Advisor
An HSA may not be right for you now. But if it is, an HSA offers the triple benefit of allowing you to save pre-tax money that grows tax-free—and as long as you are withdrawing money to pay for medical or dental expenses, you won’t have to pay taxes on those funds.
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