October 13, 2020
By Rahul Iyer
A health savings account helps you save money for medical expenses tax-free. It’s like the medical cost equivalent of a retirement account when it comes to tax savings.
As long as you use the money you put aside for qualified medical expenses, you pay no taxes on the funds. It’s a win-win.
Like any other tax-advantaged accounts, there are rules. Here’s how it works.
A health savings account is a tax-advantaged savings account that helps you pay for your medical expenses.
You may contribute up to $3,550 for an individual or $7,100 for a family per year. You must have a high deductible insurance plan to qualify, which means at least a $1,400 deductible for individuals or $2,800 deductible.
The easiest way to get a Health Savings Account is through your employer. If they offer it, they’ll automatically transfer the funds from your pay and transfer it to your HSA. The funds are transferred before taxes, which lowers your tax liability.
The money sits in your HSA, earning interest, or getting invested (depending on the type of account). If you have a medical bill, including co-insurance, a co-payment, or out-of-pocket expense, you pay it with your Health Savings Account funds. Your plan will provide you with either a debit card or checkbook to make the payments.
If your employer doesn’t offer an HSA, you may open one yourself at any broker offering the program. Rather than your employer transferring the funds, though, you’ll be responsible for the transfer. You’ll pay taxes on the money when you get paid but may deduct your contributions on your tax returns each year.
Your HSA funds never expire. If you don’t use the money you contributed this year, it remains in your account and rolls over to the next year. You can keep rolling the funds over as needed, even into retirement.
While you can’t contribute to your Health Savings Account once you’re on Medicare, you can continue to use the funds to pay your medical expenses.
You may use your HSA funds for just about any health expenses except your premiums. In addition to the normal health-related costs we discussed above, you may also use them for:
The only ‘medically’ related expense you can’t use the funds on are over-the-counter drugs that you can buy without a prescription.
If you have an HSA at your disposal, take advantage. Everyone has medical expenses and if you have a high deductible, it can help offset your medical expenses and help you save money on taxes.
It’s a win-win for you, helping make your medical care more affordable while taking the sting out of having a high deductible health insurance plan, which even group insurance plans often include. Healthcare is expensive, but with an HSA it can be more affordable.