The words “tax-free” make almost everyone stop and pay attention. Yet, each year, many Americans either ignore or aren’t aware of the opportunity for this added savings while choosing their health plans during the annual open enrollment period. A Health Savings Account (HSA) offers this tax-free perk, allowing you to save money for qualified health-related expenses while helping reduce your taxable income.
HSAs help give you control over your health care spending.
To qualify for an HSA, you must be enrolled in a high-deductible health insurance plan, as defined by the government. This type of health plan means you pay more before insurance kicks in (high-deductible) but less for the set amount you owe on a monthly, quarterly or yearly basis (low-premium) than other health plans.
You can contribute as little as $1 or up to the federal limits into your HSA account. In 2020, you can deposit up to $3,550 for an individual HSA plan and $7,100 for a family HSA plan. Some employers contribute money as well.
You can use your HSA funds, on a tax-free basis, to pay for qualified medical expenses such as prescription drugs, dental expenses, co-pays, deductibles or co-insurance amounts. Your HSA can also be used to pay your Medicare, long-term care insurance premiums and your deductibles.
Unlike flexible spending accounts (FSA), where you’ll lose its balance at the end of the year, unused HSA balances carry over from one year to the next. So, there is no “use it or lose it” worry with your HSA.
HSAs are triple tax-free.
Not just tax-free, but triple tax-free? That’s music to the ears of those looking to save. Understanding the potential of your HSA is key to preparing for upcoming costs.
With an HSA, lowering your taxes may be as easy as 1-2-3:
- The payroll contributions you make to your HSA are made pre-tax so that less of your income is taxed.
- Money in your HSA typically grows tax-free. Many accounts offer interest earned on your savings and even investment opportunities.
- You can withdraw money to pay for qualified medical expenses and pay no taxes on that money.
Consider HSAs for retirement.
If you have the option of contributing to both your HSA and a 401(k), it can be difficult to decide where to focus. Both 401(k) pre-tax payroll contributions and HSA payroll contributions are made without deductions for state and federal taxes. However, HSA contributions are truly pre-tax in that Medicare and Social Security taxes are not withheld. Check with your accountant or tax advisor to find the right approach for you.
Click here to learn more about HSAs. Whether you’re single, have a growing family or are thinking ahead to your post-career life, HSAs can empower you to make the most of your health care spending.