A Health Savings Account (HSA) can be a great way to save for one of the most important things in life – you and your family’s health. This increasingly popular account allows you to set aside money in a tax-advantaged account to cover the cost of medical expenses each year; however, there are rules and regulations for HSAs, so not everyone can or should use one. Keep reading to learn more about HSAs, qualification requirements, benefits, and disadvantages.
The Ins and Outs of an HSA
An HSA allows you to use pre-tax dollars for qualified medical expenses now and in the future. These medical expenses can include: prescriptions, doctor’s office visits, dental treatments, and even surgical procedures. Each year you can contribute to an HSA as long as it doesn’t exceed the government-mandated maximum contribution limits.
To be eligible for an HSA, you need to meet the following requirements:1
- Must be enrolled in a high-deductible health plan (HDHP)
- Must not be enrolled in Medicare
- Must not be claimed as a dependent on someone’s taxes
- Must not be covered on a spouse’s health plan
To learn more about HSAs, read: Save on Medical Expenses with a Health Savings Account (HSA).
Pros of an HSA
HSAs offer several other benefits. Once you meet the HSA requirements, you can:
- Make your money work smarter. Get the triple tax advantage and utilize pre-tax dollars for qualified medical expenses, as:
- Contributions are tax-deductible
- Account assets grow tax-free
- Withdrawn funds are not taxed, as long as they are used for qualified medical expenses
- Boost your retirement fund. After age 65, you can use your HSA savings as retirement money and withdraw funds from an HSA without incurring tax penalties, even if used for non-medical expenses; however, the money would still be subject to income tax.
- Welcome contributions from your employer. Employers can contribute to HSA accounts; however, the total of your employer’s contribution plus your own, still must be within the annual contribution limits.
- Roll over unused funds each year. Any balance leftover in the account at the end of the year rolls over into the next year.
- Own your portable account. It’s yours. If you change jobs, you can enroll in a new healthcare plan and maintain access to your existing HSA, even if your new healthcare plan doesn’t qualify. Additionally, in most cases, you can use a debit card or checks to easily access your funds.
Cons of an HSA
- You must have a High Deducible Health Plan (HDHP) to qualify. In an HDHP, you typically pay more money out of pocket before your insurance kicks in, making upfront costs higher.
- You’ll pay a penalty for non-qualified medical expenses. Because this account is intended to be used for medical expenses only, if you take money out of an HSA for non-medical reasons, you will have to pay taxes on it. If over the age of 65, there is no tax penalty for non-qualified medical expenses, but the money would still be subject to income tax. It’s a good idea to keep all receipts for your tax records.2
- You may find it challenging to budget and save money in an HSA. For some, setting aside funds in an HSA might not be easy. Additionally, it can be hard to determine what amounts may be needed for future illnesses.
How Much Should You Contribute to Your HSA?
The short answer: as much as possible. If you’re financially able, it’s recommended to contribute the maximum allowed by the IRS because the funds in this account are tax advantaged, meaning contributions are not taxed, earnings from interest are not taxed, and distributions for qualified medical expenses are not taxed. Your decision will depend on your individual financial situation with your overall budget and savings in mind.
What Can You Do with Unused Funds?
At the end of the year, if you have extra funds accumulated in your HSA and don’t need immediate access to the money, you may consider putting your unused balance in an HSA Certificate. Interest rates for an HSA Certificate are typically higher versus a standard HSA; therefore, you’ll accumulate additional savings for future medical needs. Before doing this, know that a Certificate has penalties for early withdrawals.
If you’re considering whether an HSA is right for you, first look at the account requirements to determine eligibility. Then you’ll be better equipped when it’s time to open one. By contributing to an HSA throughout the year, you may find it’s easier to pay for medical expenses as the savings are already set aside and easily accessible.
Tip: At GECU, we realize the importance of saving for your and your family’s healthcare expenses, so we don’t charge the fees that are commonly associated with an HSA and offer convenient accessibility. We offer no setup or monthly maintenance fees, no minimum balance requirements, and convenient access with free HSA checks, a debit card, Online Banking, our mobile app, and Bill Pay. When you’re ready, we’re here for you. To open your HSA, or transfer or rollover from another HSA, stop by your local branch to speak with a team member.
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1 IRS Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans
2 HSA Store Compound It! Keep Your HSA Records in Order