A health savings account, or HSA, is a tax-advantaged account that can be used to pay for qualified medical expenses including copays, coinsurance, and deductibles. By using pre-tax money to save for these expenses, an HSA may be used to help lower overall medical costs. (You may hear some people refer to it as HSA health insurance, but it’s actually separate from your insurance policy.)
What’s more, HSAs can also be a savings vehicle for retirement that allows you to put away money for later while lowering your taxable income in the near term.
To learn more about HSAs, read on and learn:
• The meaning of an HSA
• HSA benefits
• Who’s eligible for an HSA
• How much an HSA costs
How Can an HSA Benefit You?
HSA benefits can help make some aspects of healthcare more affordable. An HSA (meaning a health savings account) is a tool designed to reduce healthcare costs for people who have a High Deductible Health Plan (HDHP). In fact, you must have an HDHP to open an HSA.
If you’re enrolled in an HDHP, it means you likely pay a lower monthly premium but have a high deductible. As a result, you typically end up paying for more of your own health care costs before your insurance plan kicks in to pick up the bill. Combining an HDHP with an HSA may help reduce the higher costs of health care that can come with this type of health insurance plan.
Yearly HSA contributions can be up to $3,650 for individuals, or up to $7,300 for families, in 2022. Persons 55 or older by the end of the tax year have the option to make an additional contribution of $1,000 per year, which is known as a catch-up contribution. HSA contributions can be made by the qualified individual, their employer, or anyone else who wants to contribute, including friends and relatives.
Contributions are made with pre-tax money and can grow tax-free inside the HSA account. Some accounts allow money to be invested in mutual funds or even stocks. Withdrawals made to cover qualified medical expenses may not be taxed. And because money in the account is pre-tax — Uncle Sam never took a bite out of it — qualified medical expenses can essentially be paid for at a slight discount. And by contributing pre-tax dollars to an HSA, you are decreasing your taxable income and potentially moving into a lower tax bracket.
How Can You Use an HSA?
The money you contribute to your HSA can be used on an array of healthcare expenses that aren’t paid by your insurance. Rather than dipping into your checking or savings account, you can use an HSA to pay for qualified medical expenses. The IRS provides a long list of these expenses, including:
• Copays, deductibles, and coinsurance
• Dental care
• Eye exams, contacts, and eyeglasses
• Lab fees
• X-rays
• Psychiatric care
• Prescription drugs
But there are also a number of unqualified expenses as well. These costs include:
• Cosmetic surgery
• Teeth whitening
• Health club dues
• Nonprescription drugs
• Nutritional supplements
How Can an HSA Benefit You?
You may wonder if an HSA is worthwhile. Depending on your situation and your healthcare expenses, it may be a good use of your funds. To help you decide whether or not to start a health savings account, here are some important HSA benefits to consider.
Triple Tax Advantages
Putting money into an HSA lowers taxable income. The money contributed by a qualified individual to the account is pre-tax money, so it will be excluded from gross income, which is the money on which income taxes are paid. This is the case even if an employer contributes to an employee’s account on their behalf. So if you earn $50,000 a year and max out your HSA contribution, you will only be taxed on $46,350. Contributions made with after-tax funds are tax-deductible on the current year’s tax return.
There are other considerable tax advantages that come with HSAs. Contributions can earn interest, or returns on investments, and grow tax-free. This tax-free growth is comparable to a traditional or Roth IRA. However, HSAs have a significant tax advantage over these accounts.
Here’s another angle on these HSA benefits: Not only are contributions made with pre-tax money, but withdrawals that are made to pay for qualified medical expenses aren’t subject to tax at all. Compare that to say, Roth accounts where contributions are taxed on their way into the account, or traditional IRAs where withdrawals are taxed.
Recommended: Common Questions about IRA’s
It’s Investable
As money builds in an HSA, you can save it for future healthcare costs. The funds can be invested in ways that are similar to other workplace retirement accounts. They can be put into bonds, fixed income securities, active and passive equity, and other options. You could potentially be investing money in this way for decades prior to retirement.
Using an HSA for retirement might also be a good way to prepare for the healthcare expenses as you age. In fact, healthcare may be one of the biggest retirement expenses. According to some estimates, a 65-year-old couple will need more than $387,000 to cover healthcare costs over the rest of their lives. An HSA could be a good way to stash some cash to put towards those charges.
If you were to become chronically ill or need help with the tasks of daily living as you age, you might need long-term care at home or in a nursing facility. Medicare does not cover long-term care, but long-term care insurance premiums are qualified expenses and can be paid with HSA funds. Saving in an HSA before these potential costs arise may offset overall spending on healthcare expenses later in life.
The Money Is Yours and Stays That Way
Another advantage of HSAs is that contributions roll over from year to year. In comparison, flexible spending account (FSA) funds, which also allow pre-tax contributions to save for qualified healthcare expenses, must be spent in the same calendar year they were contributed, or you risk losing the funds. HSAs don’t follow this same use-it-or-lose-it rule. Funds contributed from year to year are available the next year. There is no time limit or expiration date saying you must spend the money by a certain year. What’s more, your HSA funds follow you even if you change jobs and insurance providers. It can be very reassuring to know those funds won’t vanish.
Who’s Eligible for an HSA?
If you are covered by a HDHP, you are probably eligible to open an HSA. For 2022, the IRS defines high deductible plans as any plan with a deductible of $1,400 or more for individuals and $2,800 or more for families. What’s more, your yearly out-of-pocket expenses can’t exceed $7,050 ($14,100 for families). These limits do not apply for out-of-network expenses.
Here’s one eligibility situation to be aware of: Once you enroll in Medicare, you can no longer contribute to an HSA, since Medicare is not an HDHP. If you have an HSA, those funds are still yours, but you can’t continue adding to the account.
Who Can Open and Contribute to an HSA
You may open and contribute to an HSA if you enrolled in a High Deductible Health Plan, or HDHP. The IRS defines this as having a deductible of at least $1,400 for an individual and $2,800 for a family.
What if I Already Have an HSA?
If you already have a healthcare savings account, you may continue to contribute to it as long as you have that plan and are not enrolled in Medicare, which is not an HDHP. Even if you no longer have an HSA-eligible insurance plan, that money is yours to spend on healthcare expenses, invest, or transfer.
Choosing between Two Different HSAs
Not all HSAs are identical. If you open an HSA or already own an HSA, you will have to make a key decision (this is especially true if you are using a healthcare savings account to build up money to use when you retire). The choice is: Do you want to manage the fund yourself, or would you like a financial professional to manage your portfolio and guide your growth? There is no right answer; it’s all about your personal taste and money style. But keep it in mind, and know that there are choices available. You can open an HSA at a number of different financial and other institutions, with or without account management.
How Much Does It Cost?
If you decide that a healthcare savings account is right for you, don’t be surprised if you are hit with fees when you open one. Some of these accounts may charge you every month to maintain the account, especially if a professional is advising you on investments. These fees may be as low as $3 or $5 a month, but could be higher. You may also be assessed a percentage of the account’s value, with that fee rising as your account’s value increases. It’s important to read the fine print on any account agreement to make sure you know the ground rules.
On the other hand, some HSAs involve no fees at all. Usually, these will involve more hands-on management by the account holder versus a financial professional.
Common Fees Charged by an HSA
As mentioned above, some HSA providers charge a monthly fee for account maintenance. These fees are typically no more than a few dollars a month. But even a $5 monthly fee adds up to $60 over the course of a year, which could be more than the cost of a co-pay for an annual check-up with a physician. So be aware that fees might take a significant bite out of potential savings.
Also note that if you withdraw funds from your account for something other than a covered medical expense before you turn 65, you could be hit with fees. These withdrawals will be subject to income taxes and a 20% penalty.
Do HSAs Give You More Options?
Many people first encounter HSAs when they are offered the opportunity to enroll at work. However, even in this situation, you have choices. You may open an account with any HSA provider, as long as you qualify on the basis of having a HDHP. So in that way, you have options regarding which account you choose and how much you save in it.
Beyond that, as outlined above, there are dozens of qualifying expenses for which you may use HSA funds. Perhaps it’s lab tests that weren’t fully covered by insurance or contact lens or counseling services. It’s up to you how to allocate the funds in your account.
HSAs are Different from FSAs
HSAs, as described above, are healthcare savings accounts for individuals who have a High Deductible Health Plan. Another financial vehicle with a similar-sounding name are FSAs, or Flexible Spending Accounts. An FSA is a fund you can put money into and then use for certain out-of-pocket healthcare expenses. You don’t pay taxes on these funds. Two big differences vs. HSAs to be aware of:
• To open an FSA, you don’t need to be enrolled in an HDHP. This is only a qualification for HSAs.
• The money put in an FSA account, if not used up by the end of the year, is typically forfeited. However, there may be a brief grace period during which you can use it, or your employer might let you carry over several hundred dollars. With an HSA, however, once you put money in the account, it’s yours, period.
Get up to $300 when you bank with SoFi.
Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!
The Takeaway
Health savings accounts, or HSAs, offer a way for people with High Deductible Health Plans to set funds aside to help with healthcare expenses. The money set aside is in pre-tax dollars, and it brings other tax advantages. What’s more, funds in these HSAs can roll over, year after year, and can be used as a retirement vehicle. For those who qualify, it can be a valuable tool for paying medical expenses and enhancing financial health, today and tomorrow.
Looking for a bank that can help you boost your financial life? Take a closer look at SoFi. Open our linked high interest bank accounts with direct deposit, and see how your money can earn more, faster. SoFi pays a stellar APY and we let you keep more of that interest rather than eating away at it with fees. SoFi doesn’t charge monthly, minimum-balance, or overdraft fees.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOBK0322037
