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A Health Savings Account (HSA) is a tax-advantaged savings account for medical expenses like doctor visits, prescription drugs, and dental care. HSAs are intended to help you save pre-tax or tax-deductible dollars to pay for qualified medical expenses that aren't covered by insurance. HSAs are often offered as a work benefit, but you may be able to open an account if your employer doesn't offer one or if you're self-employed or unemployed. HSAs are portable, meaning you can keep the account even if you leave the employer that originally sponsored it.
| Characteristics | Values |
|---|---|
| Type of account | Savings account |
| Purpose | To pay for qualified medical expenses |
| Tax benefits | Triple tax advantages: tax-deductible, tax-free growth, and tax-free withdrawals |
| Eligibility | Must have a qualifying high-deductible health plan (HDHP) |
| Contributions | No income limits, but annual contribution limits apply |
| Ownership | Individual-owned, portable across employers |
| Rollover | Funds roll over from year to year |
| Usage | Can be used for medical expenses, Medicare premiums (tax-free), and non-medical expenses after age 65 |
| Investment | Funds can be invested in stocks, bonds, and exchange-traded funds (ETFs) |
| Insurance deductible | Higher deductible, lower premiums |
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What You'll Learn
Eligibility
A Health Savings Account (HSA) is a type of savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. You can deduct the amount you deposit in an HSA from your taxable income. To be eligible for an HSA, you must meet the following requirements:
Firstly, you must have an HSA-eligible health plan, often referred to as a High Deductible Health Plan (HDHP). This means that your health plan has a higher minimum annual deductible than typical health plans. These plans generally only cover preventive services before the deductible. You can find out more about eligible plans and their yearly deductibles from the IRS.
Secondly, you must be an eligible individual. This means that you cannot be covered by another non-HDHP plan, such as your spouse's insurance. However, you can have additional insurance that provides benefits for specific cases, such as liabilities related to ownership or use of property, disability, dental care, vision care, and long-term care.
It is important to note that you do not need permission or authorization from the IRS to establish an HSA. You can set up an HSA with a qualified trustee, which can be a bank, an insurance company, or an entity approved by the IRS for IRAs or Archer MSAs.
Additionally, once you turn 65, you can use the money in your HSA for any purpose without tax implications. However, if you do not use the funds for qualified medical expenses before that, it will count as income when you file your taxes. You must also stop contributing to your HSA six months before you retire or start receiving Medicare benefits.
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Contributions
A Health Savings Account (HSA) is a tax-advantaged savings account that allows individuals to set aside money on a pre-tax basis to pay for qualified medical expenses. Contributions to an HSA can be made by the individual or their employer and are limited to a maximum amount each year. HSA funds generally may not be used to pay premiums unless they are for Medicare or other healthcare coverage for individuals aged 65 or older.
Individuals can contribute to an HSA only if they have an HSA-eligible plan, also called a High Deductible Health Plan (HDHP). These plans typically have lower premiums, enabling individuals to save money each year. HSA-eligible plans may provide certain preventive care benefits with a deductible less than the minimum annual deductible.
It is important to note that contributions to an HSA do not have to be used or withdrawn during the tax year. Instead, they are vested, and any unused contributions can be rolled over to the following year. HSA funds can be used for various medical expenses, such as doctor's appointments, prescriptions, or over-the-counter medications. However, it is recommended to consult a tax advisor regarding specific rules, as there may be state-specific regulations.
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Tax advantages
A Health Savings Account (HSA) is a savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. HSAs offer several tax advantages, including:
Tax-deductible contributions
Money contributed to an HSA is tax-deductible, meaning it can be deducted from your gross income, lowering your overall taxable income. This includes contributions made through payroll deductions, which are also not subject to Social Security or Medicare taxes.
Tax-deferred growth
Any interest or earnings on your HSA balance are tax-deferred, meaning they are not subject to taxes unless they are used for non-eligible medical expenses. This allows your HSA funds to grow over time without being eroded by taxes.
Tax-free withdrawals
Withdrawals from an HSA are tax-free as long as they are used for eligible medical expenses, such as deductibles, copays, prescriptions, vision, and dental care. This allows you to pay for qualified medical expenses using pre-tax dollars, reducing your out-of-pocket healthcare costs.
Rollover and job portability
HSA funds roll over from year to year, and you retain ownership of the account if you change jobs or switch health plans. This means your HSA funds can continue to grow tax-free even during periods of employment transition.
Flexibility in retirement
Once you reach retirement age, you can use your HSA funds for any purpose without penalty. If you use the funds for non-medical expenses, the withdrawals will be treated as income and taxed accordingly, but you have the flexibility to choose how to utilize the savings you've accumulated.
Overall, the tax advantages of HSAs make them an attractive option for those with high-deductible health plans to save for current and future healthcare costs while also reducing their tax liability.
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Rollover and withdrawal
A rollover is when you transfer your HSA from one provider to another. This could be an HSA that you open on your own at a financial institution or one that you get access to through a new employer. The money in any HSA is yours to keep, even if your employer provides the account and makes an HSA contribution on your behalf. You can carry your funds with you across many jobs and different calendar years, making HSAs a unique way to save for health costs.
You can roll over any unused funds to the next year, making it possible for you to grow your account and plan for future medical expenses. The money simply carries over from year to year and is yours to keep. If you leave your job, you can take all your HSA money with you using a rollover. If you opened an HSA with a bank or brokerage and want to switch to a different one, a rollover also gives you the option to do so.
To complete an HSA rollover, you’ll generally need to request one from your current HSA provider. Let them know that you want to close the account and move your funds to a different provider account. You can typically contact your provider online or via phone using the number on the back of your HSA card or the information in your plan paperwork. The provider can then send you a check or deposit the funds in your bank account. You then deposit the money into your new account.
You must complete the rollover within 60 days to avoid taxation on the funds. You're limited to one rollover every 12 months, and you risk owing income taxes plus a 20% penalty for a non-qualified withdrawal if you don't redeposit your HSA funds within this time frame. Trustee-to-trustee transfers eliminate these risks. There's no chance of incurring a penalty because your money is deposited directly into your new HSA for you.
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Investment opportunities
A Health Savings Account (HSA) is a useful tool for individuals looking to save money on healthcare costs and potentially earn long-term growth with significant tax savings compared to other retirement account options. HSA investment accounts are triple tax-advantaged, meaning contributions are tax-deductible, growth is tax-free, and distributions are tax-free when used for qualified medical expenses.
HSA funds can be invested in a variety of ways, including stocks, mutual funds, exchange-traded funds (ETFs), and bonds. Some HSA providers offer tools that help users choose their investments and provide automatic rebalancing, ensuring that their portfolio aligns with their preferred allocation.
For example, HSA Bank offers three investment options: Choice, Select, and Managed. These options provide thoughtfully chosen securities that are aligned with the user's HSA and financial objectives. Similarly, HealthEquity offers AutoPilot, GPS, and Self-driven options for investing in mutual funds.
Fidelity Go HSAs are intended for investing goals of three years or longer, allowing users to reimburse themselves for qualified medical expenses by submitting a withdrawal request. They also offer pre-selected Fidelity HSA Funds to Consider, which include stocks (including fractional shares), bonds, ETFs, mutual funds, and more.
Associated Bank also provides HSA investment options, allowing users to invest in high-quality, low-cost mutual funds. They offer the freedom to choose the sweep threshold and the investment mix that aligns with their financial goals and strategy.
It is important to note that investing in an HSA comes with risk, and individuals should consult their financial and tax advisors before making any investment decisions.
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Frequently asked questions
HSA stands for Health Savings Account. It is a tax-advantaged savings account for medical expenses like doctor visits, prescription drugs, and dental care.
HSAs are intended to help you save pre-tax or tax-deductible dollars to pay for qualified medical expenses that aren't covered by insurance. You can open an HSA if you enroll in a high-deductible health plan (HDHP).
HSAs allow you to pay for qualified medical expenses using pre-tax income, which could save you money on out-of-pocket health care costs. HSAs can also be used to pay for expenses beyond healthcare after you turn 65.
High deductibles mean higher out-of-pocket costs, and HSAs may not be the best solution for everyone. You must be enrolled in a health insurance plan with a high deductible to contribute to an HSA, leaving you responsible for more costs before coverage.
HSAs are often offered as a work benefit, but you may be able to open an account if your employer doesn't offer one or if you're self-employed or unemployed. Banks, credit unions, and other financial institutions offer HSAs.
