With the rising cost of health insurance, more people with employer-based health coverage have been choosing high-deductible health plans (HDHP). According to the National Center for Health Statistics, the popularity of HDHPs more than doubled from 2007 to 2017. Although they have lower monthly premiums, someone enrolled in an HDHP has more out-of-pocket medical costs.
To help ease the burden of higher medical expenses, a Health Savings Account (HSA) allows those enrolled in an HDHP to save for medical expenses. Listed below are several ways an HSA works.
Three ways to save.
Money can be saved in your HSA in three ways. First, most people set up a payroll deduction with their employer to have money saved automatically. Second, money can be transferred from your bank account to your HSA at any time. Third, an increasing number of employers are contributing money to their employees’ HSAs.
Tax savings–the real benefit of HSA’s.
- Your contributions are pre-tax. This means you won’t pay federal or state income tax on your contributions. If you put money in your HSA outside of payroll deduction, you’ll simply claim the deduction when you file your taxes.
- Your earnings are tax-free. Unlike a regular savings account, you won’t pay taxes every year on money you earn.
- Your withdrawals are tax-free. Withdrawals for qualified medical expenses are tax-free!
All other accounts with tax benefits (IRAs, for example) have taxes owed on the money that goes in or when the money comes out. HSAs are the only accounts with these triple tax benefits.
What are qualified medical expenses?
Qualified medical expenses include doctor visits, prescription medications, chiropractic services, and long-term care premiums.
How much can I save?
In 2019, a family covered under an HDHP can save $7,000 in an HSA, while an individual covered by an HDHP can save $3,500. Those 55 and older can save an additional $1,000 per year.
Can I invest my HSA?
Yes! Some HSA providers allow you to invest your HSA dollars in mutual funds. Money that might be used to cover medical expenses in the near future may best be kept in cash. If you are aggressively saving in your HSA, then investing can allow your balance to grow faster over time.
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