A health savings account is a triple-tax-advantage instrument that may be utilized for purposes other than healthcare expenses. If you can contribute to a Health Savings Account, you know that can be an excellent method to pay your medical expenses; however, they are capable of much more. To be qualified to contribute, you must be insured by a High Deductible Health Plan, which makes such accounts beneficial for medical bills.
Aside from that primary purpose, Health Savings Accounts can also help you fund your retirement. Indeed, when it comes to serving as a retirement account, HSAs are vastly underappreciated.
The IRS has stated that they are accessible to those who have a high-deductible health plan with a minimum deductible of $1,500 for an individual or $3,000 for a family in the year 2023. HSAs provide far more than simply coverage for current healthcare bills; they come with triple tax benefits, flexibility, and long-term growth. Here’s why you should think about getting one.
The triple tax break
An HSA, like an IRA, allows you to make annual payments and provides considerable tax benefits. Here are three tax benefits you should be aware of:
- Contributions to an HSA are tax-deductible at the federal level, lowering your taxable income.
- Contributions and profits are both tax-free in the United States.
- Withdrawals for eligible out-of-pocket medical costs are tax-free regardless of age. Deductibles, copayments, prescriptions, required medical equipment, and medical treatment not covered by insurance, such as dental, vision, hearing, and long-term care, are examples of such expenditures. You have the option to use it for paying the medical bills of your spouse or any other dependents.
But here’s the catch: It’s a different issue if you use the money for something other than a qualifying medical cost. If you’re under 65, you’ll have to pay regular income taxes on the withdrawal and a 20% penalty (Once you reach the age of 65, you are eligible to use an HSA to pay for any expenses. However, note that any withdrawals will be taxed as regular income, without additional penalties). By following the rules, you can save a significant amount of money in taxes.
How does an HSA function?
Your HSA balance is carried forward year after year. The HSA is particularly valuable since, unlike a flexible savings account, you do not lose it if you do not utilize it. So you don’t have to spend simply to spend; you can leave it alone to grow tax-free if you don’t need the money. Furthermore, your HSA is portable, so you can take it if you change jobs.
You may open an HSA regardless of your income.
Unlike IRAs and Roth IRAs, there is no income cap for HSA contributions. This implies that even earning a greater salary, you can still benefit from a federally tax-deductible account. As a result, an HSA can serve as a complement to an IRA.
HSA provides another option to save for the future.
Your HSA can also be used as an investment vehicle if you are lucky enough not to require cash for ongoing medical expenses. Your HSA funds can be invested in mutual funds, equities, or ETFs (depending on the plan and often once a minimum account balance is met).
Time is, of course, an important aspect of fully using an HSA’s investment growth potential. Depending on your age, your HSA could supplement your retirement accounts or even a separate retirement account for healthcare when you reach those golden – but often expensive – years.
Contribution limits for 2023 are $3,850 for individuals and $7,750 for families. In addition, people 55 and older are eligible for an additional $1,000 catch-up contribution.
Do your homework before opening an HSA.
The benefits of HSAs greatly exceed the drawbacks, but as usual, do your research. First, learn more about any high-deductible health plan you’re purchasing. While premiums may be lower, medical network requirements or restrictions may apply.
You should also look into any costs associated with an HSA account. A monthly maintenance charge and fees for using checks or debit cards might exist. When investing your HSA funds, keep in mind the potential costs.
If you have this option available, you should strongly consider taking advantage of this perk. It can benefit your medical requirements, taxes, and long-term financial health making it a good deal.