The Health Savings Account (HSA) has become a popular way of paying for eligible medical expenses, particularly because they feature a triple tax advantage.
Think of an HSA like a savings account for medical expenses. It is held in an employee’s name to pay for eligible health care expenses. You can use an HSA to pay for eligible health care, dental, and vision expenses for yourself, your spouse or eligible dependents with tax-deductible dollars.
You can use the money to pay a deductible, doctor and dentist bills, prescription copays, eye exams, contacts and prescription glasses and medical supplies. You cannot use HSA money to pay insurance premiums. However, if you lose your job, you may qualify to withdraw funds from your HSA to cover health insurance premiums, according to the IRS.
Some expenses may be eligible even if they are not covered by health insurance at all, such as laser eye surgery or fertility treatments.
Triple tax advantage:
Contributions can be adjusted as frequently as permitted by your employer.
You — not your employer or insurance company — own the money in your HSA account. You decide how much to contribute each year, up to the IRS maximum (2024 maximums are $4,150 for individuals and $8,300 for a family). Those 55 and older can contribute an additional $1,000 per year. If you are enrolled in Medicare Part A or Parts A and B, you are not able to contribute to an HSA.
If you leave your job, your HSA bank account goes with you. The balance of the HSA stays in your account, even into retirement. Speaking of retirement, at age 65, if you withdraw money for purposes other than health care expenses, it is subject only to income tax. This can be a good retirement strategy: You can elect to pay for all medical expenses out of pocket while you’re working and save the annual contributions (remember, they carry over!) to pay for medical expenses in retirement when you are no longer collecting a salary.
One important distinction about an HSA is that it is only available with a qualified High Deductible Health Plan (HDHP).
If you change to a health plan that is not an HDHP, you can no longer contribute to the HSA bank account, but you can still use funds for HSA-eligible expenses. The money is linked to a debit card (or old-fashioned checks).
The HSA golden rule: Save your receipts. Any time you go to the pharmacy, physician’s office, eye doctor or dentist. Do this even if you buy an HSA-eligible item at a grocery store pharmacy section, just in case you need to submit a claim.
A comprehensive list of eligible expenses can be found at HSA Store.
To help you determine how much to set aside each year: HSA Calculator.
Key takeaways:
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If you would like more information about an HSA, give us a call.