To save money for qualified medical expenses, people with high deductible health plans (HDHPs) can open a health savings accounts (HSA), which is a tax-advantaged account. Each year, only a certain amount can be contributed to the account by the individual or their company. The payments are invested over time and can be used to cover certain medical costs, including prescription drugs and care for one’s health, dental, and vision needs. Read more on fidlarmusic.com
1. Health Savings Accounts: People without insurance don’t gain much
Many low-income individuals won’t have any money left over after paying their premiums and paying in full for necessary medical care before reaching their deductible. Even if they are eligible to make contributions, the tax benefit is negligible because the vast majority of uninsured individuals fall into the 12 percent tax bracket or lower, meaning that they would only save 12 cents of taxes on every $1 invested in an health savings accounts.
2. Health Savings Accounts: People with high incomes gain the most
Despite the fact that they are in the highest tax band and are therefore less likely to require a tax break to pay for insurance or medical treatment, they nonetheless get the biggest tax reduction for every dollar invested in an health savings accounts. For instance, someone in the 37% tax bracket saves 37 cents in taxes for every dollar invested in an HSA, is eligible to make investment gains, and is able to withdraw the money tax-free.
3. Health Savings Accounts: Contribution regulations for HSAs
The money in an health savings accounts can grow tax-free for as long as you’d like by being invested after being contributed, which is something you can do. Your ability to contribute to an health savings accounts is subject to annual caps set by the IRS, which are subject to periodic revision. In 2023, you may donate up to the following sums to an health savings accounts :
You may contribute up to $3,850 ($3,650 for 2022) if you just have self-insurance.
If you have family coverage, you may make a contribution of up to $7,750 ($7,300 for 2022).
A catch-up payment of $1,000 is permitted for people over the age of 55.
If your employer makes a contribution on your behalf to your health savings accounts, that amount goes toward your yearly cap. health savings accounts contributions typically vest right away, so you can keep any money you get from your employer even if you quit your job right after they provide it to you.
4. Health Savings Accounts: HSA tax benefits
- Tax-free donations
Pre-tax money is used to fund an health savings accounts . If your employer withholds contributions from your paycheck, they will be deducted prior to income taxes. You can write off your direct contributions to an HSA on your tax return. This could result in significant up-front savings. - Growth without taxes
It’s not necessary for the funds in your health savings accounts to remain inactively in a savings account. With those funds, you can invest in stocks and bonds in the hopes of seeing growth over time. Additionally, your HSA’s investment gains, dividends, and interest are all tax-free, just like they are in a tax-advantaged retirement account. - HSAs allow you to invest the money and take advantage of tax-free growth, so you can approach this as a long-term investment account rather than a short-term health care expenditure account, much like any other tax-advantaged retirement account.
- Tax-free distributions. If you use the money for certain medical costs, you can withdraw money from your HSA tax-free. If you use the money in your HSA for anything else, you’ll have to pay taxes on the withdrawals and, if you’re under 65, a 20% tax penalty.
- Your HSA can essentially act as an additional retirement account once you turn 65. You can still make tax- and penalty-free withdrawals from your HSA to pay for certain medical costs. Additionally, if you take money out for any other purpose, you won’t be penalized, but you will be responsible for paying income taxes on the distribution.
5. Health Savings Accounts: HSA reimbursement guidelines
You have two options for paying for eligible expenditures: using an HSA debit card or paying cash for qualifying fees and getting reimbursed.
While using a debit card can be more convenient, not all HSA accounts support this feature, and not all qualifying medical services are debit card-payable. You must provide receipts in order to get reimbursed if you paid the qualifying costs and want the money back.
6. Health Savings Accounts: Using your HSA in retirement- 4 ways
- Support transition to Medicare If you retired before turning 65, you could still want health insurance to help you get by until you become eligible for Medicare at that age. There are two exceptions to the general rule that HSAs cannot be used to pay for private health insurance premiums: paying for coverage obtained through an employer-sponsored plan through COBRA and paying premiums while collecting unemployment benefits. This is true regardless of age, but it can be useful if you lose your job or choose to quit working before you become 65.
- Pay Medicare premiums You can pay for some Medicare costs with your HSA, such as Part B and Part D prescription drug insurance premiums, but not supplemental (Medigap) policy premiums. An HSA can also be used to cover your portion of costs if you’re a retiree over 65 with employer-sponsored health insurance.
- The price of long-term care A “tax-qualified” long-term care insurance policy can have some of its costs partially covered by your HSA.7 You can do this whenever you want, but as you age, you can utilize more.
- Cover daily costs If you use HSA funds for anything other than health care after age 65, there is no penalty. However, just with pre-tax withdrawals from your 401(k), you will be required to pay income tax.
Conclusion
HSAs provide several advantages, including the ability to save for future qualifying medical expenses, such as those incurred in retirement, in addition to spending for immediate needs. You can better grasp how to take advantage of this expanding health care savings opportunity by adopting the healthy practices described here.
