Benefits of Health Savings Accounts
You may have seen the acronym HSA on your bank's website or even seen the option available through your employer benefits package. So, what on earth is an HSA? HSA stands for Health Savings Account. HSA accounts allow an individual or family to allocate funds specifically for qualifying out-of-pocket medical expenses, while saving money on taxes in the process when the account is used appropriately. To be eligible to contribute to a HSA, you must have a high deductible health plan (HDHP), have no other insurance, and are not Medicare eligible. For 2020, a health plan is considered a HDHP if it has a deductible of at least $1,400 for individual coverage or $2,800 for family coverage. If these criteria are met, an individual can contribute up to $3,550 per year and a family can contribute up to $7,100 per year to an HSA account.
When used the correct way, an HSA offers triple tax savings — contributions are made to the account on a pre-tax basis (meaning you get to deduct contributions from your taxable income for the year), the account can grow tax-deferred (similar to a retirement account and many HSAs can be invested in mutual funds or other investment vehicles), and finally, withdrawals are tax-free when used to pay for qualifying medical expenses including deductibles, copayments, and coinsurance. Unlike a Flexible Spending Account, which is use it or lose it, if you do not use your HSA money during the given year, the balance rolls forward from one year to the next.
Although there are various benefits to HSAs, withdrawing funds from an HSA account before age 65 for a non-qualified expense results in a 20% tax penalty on any money taken out. Once you reach age 65, you can withdraw funds without paying the 20% penalty (however, you are subject to federal income taxes on non-medical distributions). You also have the option to use your HSA funds to pay for Medicare premiums.
Visit with your CPA or employer to see if an HSA is appropriate for you. And, give me a call if you want to evaluate how contributing to an HSA can impact your financial plan!
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with your financial professionals regarding your personal situation prior to making any financial related decisions. Waddell & Reed does not offer tax advice. (08/20)