Health Savings Accounts, commonly known as HSAs, are a unique tool for saving for future healthcare expenses, offering significant tax advantages.
Let’s explore some of the basics of HSAs and how you can leverage it for your personal—and financial—wellness.
Article overview
- Eligibility for an HSA
- Employer HSA Contributions & Limits
- Tax Advantages of HSAs
- HSA as an Extra Emergency Fund
- Conclusion
How to Qualify for Health Savings Accounts (HSAs)
To qualify for HSA contributions, you must be enrolled in a high-deductible health plan (HDHP), defined as one with an annual deductible of at least $1,600 for individual coverage and $3,200 for family coverage. Additionally, you cannot be a dependent on someone else’s tax return or enrolled in Medicare to be eligible to contribute to an HSA.
If you’re not in a high-deductible health plan, you might consider a Flexible Spending Account (FSA). While FSAs offer a nice benefit, they come with a “use-it-or-lose-it” rule: You must spend the entire amount you contribute within the same tax year or forfeit any unused funds. In contrast, HSAs allow you to accumulate funds over time, making them a more flexible option for many.
Employer Contributions and Limits
Most employers offer HSAs that allow you to contribute directly from your paycheck, which is a valuable perk. If your employer does not provide an HSA and you are in a high-deductible plan, you can open one independently.
For 2024, you can contribute up to $4,150 if your plan covers only yourself, and up to $8,300 for family coverage. These limits will increase in 2025 to $4,300 and $8,550, respectively. Keep in mind that contributions from both you and your employer count towards these limits. For instance, if your employer contributes $1,000 annually to your family HSA, ensure that your monthly contribution does not exceed $608.33—($8,300 - $1,000)/12—to maximize the amount your employer can contribute.
Tax Advantages
HSAs provide a tax deduction for contributions, and any investments within the account grow tax-free. When you withdraw funds for qualified medical expenses, those withdrawals are also tax-free, thus HSAs are often referred to as being “triple tax-free” accounts.
You can withdraw money from your HSA at any time to cover current or past healthcare expenses, and there’s nothing wrong with regularly doing so. However, if you can cover most of your healthcare costs out-of-pocket, consider leaving your HSA funds untouched. This strategy allows you to invest those funds, potentially growing your balance significantly over time. A well-funded HSA can be invaluable in retirement, helping to cover health insurance premiums—whether Medicare or private insurance. Those funds can be particularly helpful if you retire before age 65 (Medicare eligibility age) since private health insurance is very costly.
Using Your HSA as an Extra Emergency Fund
Another strategy is to utilize your HSA as an additional emergency fund. You can reimburse yourself for past medical expenses with no time limit, enabling you to treat it as an additional safety net. Here’s how:
- Pay for Healthcare Expenses Upfront: Use your non-HSA funds to cover all healthcare costs.
- Invest Your HSA Contributions: Allow your HSA funds to grow over time by investing them.
- Track Your Expenses: Keep meticulous records of your medical expenses and receipts. Consider using an Excel file or a dedicated folder on your computer for easy access.
- Reimburse Yourself When Needed: If a significant, unexpected expense arises (health-related or not), you can reimburse yourself for past medical expenses, providing you with a cash influx.
Ideally, maintain a separate “Plan A” emergency fund to address unexpected costs, allowing your HSA to continue growing.
Conclusion
If you’re enrolled in a high-deductible health plan, take full advantage of an HSA by contributing as much as possible. Ideally, you should aim to max it out each year, especially if your employer makes contributions.
Investing your HSA dollars in low-cost, diversified index funds can help your account grow by more than just the contributions themselves. Remember, any growth through investments is tax-free. By doing this consistently over 20 years, you could very well become an HSA millionaire!
When retirement comes, leverage your HSA funds to cover health insurance premiums and other healthcare expenses, ensuring you have the financial resources needed as you age.
About the Author
Carla Adams is a CERTIFIED FINANCIAL PLANNER™ practitioner who specializes in helping women build strong financial plans around their equity compensation, including Restricted Stock Units (RSUs) and company stock options. With over 15 years of experience in financial services, Carla has in-depth knowledge and expertise geared toward helping clients with complex financial situations. She enjoys boiling down complicated scenarios through practical examples and down-to-earth conversations.