What is an HSA?
A Health Savings Account (HSA) is a financial account that combines a high-deductible health insurance plan with a tax-favored savings account.
There are certain qualifications to be eligible to contribute to an HSA Account. If you’re an individual, you must have a plan with an out-of-pocket maximum of $6,900 and a minimum deductible of $1,400, based on 2020 IRS guidelines. For a family in 2020, the out-of-pocket maximum is $13,800 and the minimum deductible is $2,800.
How Does an HSA work?
Each year, you can determine how much to contribute to the HSA account. However, you cannot contribute more than the maximum as detailed each year by the IRS. In 2020, the maximum contributions are $3,550 for an individual and $7,100 for a family. If you’re 55 years old or older, you can contribute an additional $1,000. If you’re married, and both of you are 55 or older, each of you can contribute $1,000.
You may receive a debit card or checks linked to your HSA account, or you can set up electronic transfers with your bank. You may use the funds at any time for certain qualified medical expenses. I recommend that you examine the fee schedule to find out which option avoids the most fees.
Whatever balance inside the HSA that is not used during the year will roll over from year to year. This is unlike a Flexible Spending Account (FSA); which is use it, or lose it each year. As the money grows, you may also be able to invest the money.
Tax Advantages of an HSA
The tax advantages of an HSA are why it is such a useful tool. The contributions are pre-tax/tax-deductible, any interest or returns inside the account grow tax-free, and if the funds are used for qualified medical expenses, you can withdraw the money tax-free. If used correctly, it is one of the only vehicles that offer all 3 of those major tax advantages.
Even on top of that, if the contribution goes into your HSA via payroll deduction, it may also not be subject to FICA (Social Security and Medicare Tax) on the contribution amount. Avoiding the FICA tax alone will save you an extra 7.5% on the money.
Investing in an HSA
You are also able to invest the money inside your HSA. If you do not have adequate liquid savings, then it is recommended you keep at least $5,000 to $20,000 in cash or a money market account before investing the rest. That is important to minimize the chances of needing to sell the investments during market pullbacks.
Health Savings Accounts can be wonderful tools for saving money and minimizing tax costs. You should consult with your financial advisor & tax professional to determine if an HSA is right for you and what your strategy should be with it.