Budgeting and taking care of your finances can be difficult and overwhelming. One way to help manage your money is to open a Health Savings Account, or HSA. HSAs are personal savings accounts for healthcare expenses. You can use HSAs to save for future medical bills, offset the cost of your insurance premiums, or pay for prescriptions and other medical services. It’s important to understand the Health Savings Account rules so you can get the most out of your HSA.
What is a Health Savings Account?
A Health Savings Account (HSA) is an individual savings account that you can use to pay for qualified healthcare costs, such as doctor visits and insurance premiums. The money in your HSA is not taxed and you can use it to pay for qualified medical expenses. The money can also be invested and grow tax-free, similar to an IRA.
Who is Eligible for a Health Savings Account?
To be eligible for an HSA, you need to meet certain criteria. You must be enrolled in a high-deductible health plan, which is a health insurance policy with a higher deductible than a traditional plan. You cannot be enrolled in Medicare or be claimed as a dependent on another person’s tax return. You also cannot be covered by other health insurance plans, including a spouse’s health plan.
How Much Can You Contribute to an HSA?
The amount you can contribute to your HSA depends on your health insurance plan. Generally, you can contribute up to the amount of your individual deductibles or twice that amount if you have family coverage. Generally, you can contribute up to $3,550 for individual coverage and $7,100 for family coverage, as of 2021. If you’re 55 or older, you can also contribute an additional $1,000.
What Qualifies as an Eligible Medical Expense?
Eligible medical expenses include doctor visits, prescription drugs, over-the-counter medicines, glasses, contacts, and dental treatments. These expenses must be prescribed or recommended by a doctor in order to qualify. Eligible medical expenses also include long-term care services and insurance, fertility treatments, and certain medical devices.
Tax Benefits of an HSA
There are many tax benefits of an HSA. Contributions to your HSA are tax deductible, meaning you can save on taxes. The money in your HSA will also grow tax-free, and if you use it to pay for qualified medical expenses, it won’t be taxed. You can also withdraw the money in your HSA at any time, and it won’t be taxed as long as it is used for qualified medical expenses.
HSA Investing
You can invest your HSA funds, which can help you save even more money. Depending on the financial institution you use, you may have access to mutual funds, stocks, and other investments. Keep in mind that capital gains and dividends earned on HSA investments are tax-free.
What Happens to My HSA Funds if I Leave My Job?
If you leave your job or switch to a plan that isn’t HSA-eligible, you can keep your HSA funds in an account with a financial institution or roll them into an IRA.
Penalties for Non-Qualified Expenses
If you withdraw HSA funds for a non-qualified medical expense, you will be subject to a 20% penalty. You will also have to pay taxes on the withdrawal.
Making the Most of Your HSA
HSAs are a great way to save for medical expenses and offset the cost of your health insurance premiums. It’s important to understand the Health Savings Account rules so that you can make the most of your HSA. Make sure you understand who is eligible for an HSA, how much you can contribute, and which medical expenses are eligible for reimbursement. Be sure to invest your HSA funds wisely and understand the consequences of using them for non-qualified expenses. With a little planning and understanding of the rules, you can make the most of your HSA.
