A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals save money for qualified medical expenses. HSAs are available to individuals who are enrolled in a high-deductible health plan (HDHP). The funds in an HSA account can be used to pay for medical expenses such as deductibles, copayments, and prescriptions.
One of the main benefits of an HSA is that the contributions to the account are tax-deductible, which can lower an individual's taxable income. Additionally, any earnings on the account are tax-free, and withdrawals for qualified medical expenses are also tax-free. This makes an HSA an attractive option for individuals who want to save money on their healthcare expenses while also minimizing their tax liability.
When considering an HSA, there are several important factors to keep in mind. First, it's important to understand the terms of the high-deductible health plan that you are enrolled in. You should know the deductible, out-of-pocket maximum, and any copayments or coinsurance that you will be responsible for paying. This will help you determine how much you need to save in your HSA to cover these expenses.
Another important consideration is how much you can afford to contribute to your HSA. The IRS sets annual contribution limits, which are subject to change each year. For 2023, the HSA contribution limit rose to $3,850 for one person and $7,750 for a family. It was $3,650 and $7,300 respectfully in 2022 (Source: IRS).
It's also important to consider the fees associated with your HSA account. Some HSA providers may charge fees for account maintenance, transactions, or investment management. Be sure to compare the fees and services of different HSA providers to find the one that best meets your needs.
Finally, it's important to remember that the funds in your HSA account must be used for qualified medical expenses. If you withdraw funds for non-qualified expenses, you will be subject to taxes and penalties. However, once you reach age 65, you can withdraw funds from your HSA for any reason without penalty, although you will still be subject to taxes on any non-qualified withdrawals. You may be surprised at things that can be used with an HSA. For example Amazon.com and Costco.com (as well as many other retailers) sell HSA friendly items. Even first aid kids can qualify. If you need to purchase these types of items, it may make sense to do it out of your HSA depending on your personal situation.
To recap, a Health Savings Account is a tax-advantaged savings account that can be used to pay for qualified medical expenses. When considering an HSA, it's important to understand the terms of your high-deductible health plan, how much you can afford to contribute, the fees associated with the account, and the rules around using the funds. By carefully considering these factors, you can make an informed decision about whether an HSA is the right choice for you.
Note: The above information is for informational purposes only and should not be construed as financial or tax advice. Please consult a financial or tax professional for advice specific to your situation. If you’re not a client already, you can Schedule a FIT Meeting with us at any time by clicking that link and booking directly with the advisor. Also feel free to give us a call or respond to this email.