5 Things You Need To Know About Your HSA

The triple tax benefit offered by an HSA is hard to beat


A Health Savings Account, also known as an HSA, is a tax-advantaged account that can be used to pay for medical expenses for you and your family now and in the future. The plans have gained popularity in recent years as some employers scale back on traditional health plan benefits and more people look to find their own high-deductible health insurance plans.

Created by lawmakers in 2003, nearly 22 million Americans had an HSA by 2020, with balances in the accounts totalling more than $60 billion, according to America’s Health Insurance Plan, a trade association for health insurance providers.

Health Savings Accounts are funded in two ways: either by your employer or by you (and often by both). As with retirement accounts, employer-sponsored plans are often funded with funds zapped pre-tax from your paycheck.

Here are five things you need to know about your HSA:

Why an HSA?

Historically, healthcare is one of the largest expenses you’ll face in retirement. Having a bucket of money set aside specifically for these expenses can offer protection for your other assets, which means you won’t have to draw from an IRA or 401(k) to pay for a medical emergency. What’s even better is that using money tucked away in an HSA for health-related expenses is totally tax free. Plus, the money isn’t use it or lose it. What you don’t spend from one year to the next stays in the account.

In 2021, the maximum annual contribution for an individual policy is $3,600, up $50 from 2020. The maximum contribution for a family policy is $7,200 this year. Plus, if you are 55 or older, you can make an additional catch up contribution of an extra $1,000 each year. These limits are set by the IRS. You can also invest money in an HSA in different investments including mutual funds, CDs, bonds or stocks, though not all HSAs offer investment options (and there may be a minimum balance requirement before you can turn the investment option on).

More money for retirement

If you end up not spending all the money in your HSA for healthcare expenses during your working years, it can serve as a supplemental retirement account. Once you reach 65, you can spend HSA funds on non-medical expenses without penalty; those withdrawals will be treated similarly to 401(k) withdrawals tax-wise and taxed at your current income tax rate.

The triple tax-free benefit explained

With Health Savings Accounts, taxes are not taken out of the money placed into the account, meaning, you get a tax deduction for putting it there. The money in the account grows tax free. And when you take money out, as long as it’s used to pay for medical expenses, you don’t have to pay taxes on it. Ever. If you use money from the savings account for day-to-day medical expenses, it can save you about 25% off the medical expense because of the tax advantages.

Save your receipts

Another advantage of an HSA account is this: You can save your medical receipts for the healthcare expenses you’ve paid for out of pocket through the years, then reimburse yourself from the HSA without having to pay taxes on the money. Your money can be invested for growth in the interim. It’s a wise way to put some cash back in your own pocket while taking advantage of the tax benefits.

HSAs cover braces and much more

Money in your HSA can also be used to cover procedures that aren’t typically covered by traditional insurance plans, and to cover medical expenses for your spouse or any dependents you might have. That means you can use HSA funds to pay for braces to straighten your children’s teeth, and tons of other items including dozens of over-the-counter medications.

With reporting by Casandra Andrews

Jean Chatzky

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