What Is a Health Savings Account (HSA)?

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Quick Answer: A Health Savings Account or HSA, is a sponsored health plan that you open up at work. The contributions you make are tax-free, and you can invest those contributions. You can only open an HSA if you have a high deductible health plan. You can use those contributions for medical expenses.

We all will need medical attention someday, why not pay for that medical attention without getting hammered with taxes in the meantime?

Ladies and gentlemen, I introduce to you the Health Savings Account. Also, known as the HSA.

An HSA is loaded with benefits and opening up an HSA can be a great option for many people. It has amazing tax advantages and can be invested in some of my favorite investments such as index funds and dividend stocks.

If you worry about how you will pay out of pocket medical expenses in retirement, the HSA may be the place to park your cash.

What Is a Health Savings Account (HSA), and What Are the Rules?

A Health Savings Account (HSA) is a type of employer-sponsored health plan that helps you put aside money for health care costs. It is similar to a personal savings account except that the money you put in an HSA is reserved for medical purposes only. The great thing about an HSA is you are able to invest it!

As a tax-advantaged medical savings account, HSAs are only available to verified taxpayers in the U.S. The second important requirement is that potential account holders must be enrolled in a high-deductible health plan (HDHP).

The Following are some other important rules about a health savings account that you ought to know:

Contributions to an HSA can be made by the individual themselves, their employer, relatives, or anyone else willing to add to your savings for that matter. However, the total amount must not exceed the maximum contribution limit set by the IRS (discussed later).

The money you put in an HSA is federally tax-free when the contributions are made through payroll deductions.

You can withdraw the savings regardless of your age whenever you want to pay for qualified out-of-pocket medical expenses. You can also use the funds to pay for qualified expenses for your spouse or other dependents.

You can withdraw the money for non-qualified payments too, but you have to pay a 20% penalty in addition to paying regular income tax on the amount that you withdraw.

At age 65, you can use your health savings for whatever purpose you want without facing any penalty. The money you use to pay for medical bills won’t be taxed, given that it’s spent on qualified expenses only.

What Are the Eligible Expenses of HSAs?

HSA dollars can be used to pay for a wide range of health care services, which is perhaps one of the main reasons behind the popularity of these plans.

While the IRS determines which expenses qualify for reimbursements, you can rest assured that there is a broad spectrum of eligibility, and the payments you want are likely to be covered.

The eligible expenses for HSAs include health insurance copayments, dental work and orthodontia (non-cosmetic dental treatments), hearing aids, crutches, acupuncture, chiropractic care, and physical therapy in addition to eyeglasses, laser eye surgery, contact lenses, and prescriptions.

What Is the Max Contribution of the HSAs?

The IRS generally increases the maximum contribution limits for HSAs to make up for the continuously rising cost of living. This way, you can save more effectively by setting aside a bit more pre-tax dollars for any potential medical expenses down the lane.

The maximum saving limits for HSAs have gone up by $50 for individual coverage and $100 for family coverage. Thus, individuals can save up to $3,500 in their health savings account, whereas those with a family account can save a total of $7,000 this year.

The catch-up contribution limit for HSA holders over 55 years of age, however, remains the same as last year at a total of $1,000.

What Are the Pros of an HSA?

HSA plans have become a common mode of saving for general health care because of the many benefits that they offer. Here is a brief overview of what these are:

Several Expenses Qualify

As we discussed above, HSA plans cover a wide range of healthcare services, including the costs of medical and dental, as well as mental health treatments.

Tax Savings

HSA funds have a tax-free status, which means that the money you put into your account won’t be subject to taxation.

A Safe Option to Save

Unless you decide to withdraw it, you cannot lose the money in your HSA as the balance rolls over automatically at the end of each year if it is not spent.

Full Autonomy Over the Funds

Unlike alternative plans such as the Flexible Spending Account (FSA), the money you contribute to an HSA is always 100% yours to spend, save, and invest. Your employer or your insurance company do not have any share in the funds.

Earn Tax-Free Interest

In many cases, if you maintain a minimum balance in your HSA (usually $1,000), you can earn tax-free interest by investing in mutual funds, stocks, and the likes.

How Do You Roll Over Your HSA?

According to the IRS guidelines, the funds in an HSA can be rolled over once every year without affecting the tax-free status.

To roll over the money in your HSA, you will have to contact your current HSA provider and request the same. They will then send you the money either through direct bank transfer or by mailing you a check instead. Once you receive the funds, you will have 60 days (starting from the date of transfer) to deposit them to your new savings account.

Technically, you can deposit it after this deadline too. But you will face a 20% penalty. Also, it will be considered a distribution, which means that the IRS will classify the roll over under a taxable contribution, and thus, you will be liable to pay taxes on your lump sum health savings.

Another way to move the money in your current health savings account is to request a trustee to trustee transfer rather than handling the process yourself.

This eliminates the risk of facing penalties and helps you avoid paying taxes on your savings as you won’t be touching the funds at all. Plus, there’s no limit on the number of times you can roll over your HSA funds each year. However, this process involves a considerable amount of paperwork, so make sure to complete it properly.

No matter which method you choose, keep in mind that if you are switching jobs and your new employer offers a better HSA plan than the one you have at present, it’s always better to move the money rather than leave it be.

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andrew

Andrew is the author behind Dollar After Dollar, a blog that teaches you how to build wealth and gain financial freedom.

Andrew is the host of The Personal Finance Podcast, a show that is changing the way you think about your money. His primary goal with the podcast is to bring as much value as possible to his listeners.

Andrew's favorite free financial tool he's been using since 2014 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.

His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free. It has no trading fees and is his preferred way to invest without having to lift a finger.