There are a lot of things that you don’t learn about until you’ve entered the workforce and are on your own for health insurance. All the options can be overwhelming. We are going to break down one of those options, Health Savings Accounts or HSAs, to help you gain a better understanding of what they are, how to use them and how you can benefit from having one.
What is an HSA?
A Health Savings Account is a savings account designed to help you save for medical expenses. HSAs are available to anyone enrolled in a high-deductible health care plan. With this type of plan, you will pay less monthly on health care costs but more when you need to go to the doctor or emergency room. You can then use the money in the HSA to pay for those expenses. Any funds contributed to an HSA are not subject to federal income tax at the time of deposit so you can save money to help manage health care costs while also saving on taxes.
How to Use an HSA
There are a few different ways you can use an HSA. The most common way is to use it to pay for a wide range of qualified medical expenses, including doctor visits, prescription medications, dental care, vision care and even some over-the-counter medications. In most cases, when enrolled in an HSA eligible health plan you will receive a card just like a credit or debit card that can be used in card readers at doctors' offices or pharmacies. This card can only be used specifically for medical expenses.
Let’s use the example of childbirth. Almost all medical expenses related to childbirth while in the hospital are eligible to be covered using an HSA. You can even use your HSA for co-pays at doctor visits, the doctor’s visits themselves and some products related to pregnancy like prenatal vitamins and breastfeeding necessities are also eligible.
Learn more about qualified medical expenses on the IRS website. (opens in a new tab)
You can also save for the future with an HSA. A unique aspect of an HSA is its potential to be a long-term savings tool. By contributing regularly and allowing the funds to grow, you can use your HSA as a supplementary retirement account to cover healthcare costs in your later years.
Finally, you can also invest funds in an HSA. Many HSA providers offer investment options like those in 401(k) or IRA accounts. Investing your HSA funds can lead to significant growth over time. If you can cover current medical expenses out of pocket and/or keep your deductible amount in the account, you can invest the rest.
Why Use an HSA?
Tax advantages. Any money contributed into an HSA is tax-deductible, reducing the taxable income on your paycheck. That money can then grow tax-free in the account, and you can also withdraw funds for qualified medical expenses tax-free.
The money is yours. HSAs are owned by the individual, not your employer. This means the account stays with you even if you change jobs or retire.
The funds rollover. Once you add funds to an HSA, you can use it whenever you want, the money does not expire. Unlike Flexible Spending Accounts (FSAs), there is no "use it or lose it" rule. This allows you to build up funds over time to be able to cover the high deductible on your health plan.
You can save money. If you do not go to the doctor regularly for things outside of normal checkups, you could save money by having an HSA since your monthly premium is lower.
The contribution limits for 2024 are $3,950 for individuals and $7,900 for families. Additionally, those aged 55 and older can contribute an extra $1,000 as a catch-up contribution. HSAs allow you to cover immediate or upcoming medical expenses and allow you to plan for the future. By understanding how to use an HSA, its features and benefits, you can make informed decisions and maximize your savings potential.
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. Please consult a tax or financial professional for more information.
