A Health Savings Account (HSA) is a special savings account designed for medical bills and other healthcare costs. And if you know what you’re doing, it’s also a back-door retirement account.
The main benefit of an HSA is that you may end up paying less in taxes if you contribute money to an HSA. Plus, the money you put in an HSA can be used to pay for medical bills. You also won’t have to pay taxes on that money.
You can use your HSA to pay for regular expenses like doctor’s visits, lab work, surgery and prescriptions. You can even use it to pay for tampons, contact lenses or even band-aids. Even over-the-counter medications like ibuprofen or acetaminophen are now HSA-eligible.
Healthcare premiums and some elective procedures are not eligible for HSA-reimbursement. You can find a full list of eligible medical expenses here.
As of 2020, the annual limit for contributions was $3,600 for just you and $7,200 if you’re married, as long as both of you are under an HSA-eligible plan.
Many providers also let consumers invest the money in their HSAs, like they would a retirement account. The best part of an HSA is that even those earnings will grow tax-free.
The only eligibility requirement for an HSA is that you have to be on a high-deductible health plan to open and contribute to one. Only health insurance plans with a deductible of $1,350 or more for individuals and $2,700 or more for families. However, HDHPs must have out-of-pocket costs of $6,900 or less per individual and $13,800 or less per family to qualify for an HSA.
When it’s time to choose a health insurance plan, look for ones that say they’re HSA-eligible or ask your HR person to make sure.
However, even if you’re no longer eligible to contribute an HSA, you can still use the leftover funds in your HSA. It doesn’t matter if the funds have been in the account for 20 years, you can still pay for medical expenses with your HSA.
When deciding how much to contribute to your HSA, a simple approach is to calculate how much you normally spend on medical expenses each year (not including your monthly premium) And then divide by the number of paychecks you get a year.
For 2021, the annual maximum contribution is $3,600 for individuals and $7,200 for families. If you are already saving for retirement, consider trying to max out your HSA. You’ll reduce how much you pay in taxes and save for medical bills at the same time.
Unlike a Flexible Spending Account (FSA), the money in an HSA rolls over from year to year. There’s no time limit on when you have to spend it.
Plus, when you turn 65, you can use the funds in an HSA for any reason and not owe a penalty. You’ll still pay income tax on the withdrawn amount, which is similar to taking money out of a traditional IRA or 401(k). However, if you paid for a qualified medical expense out of pocket, you can reimburse yourself from your HSA.
If you want to save on upcoming medical bills and have another place to stash money for retirment, an HSA could be the move for you.