By Theo Thimou |
When you’re signing up for health insurance at work, you may see the acronym “HSA” and wonder to yourself, “What is a health savings account?”
Health savings accounts (HSAs) can be a great way to both plan for the future and meet your health care needs right now.
The basic idea with HSAs is that you start with a high-deductible health insurance policy that offers a premium at a lower cost than traditional insurance. Then, taking the money you save in premiums versus traditional health insurance, you can funnel that cash into a tax-free investment account.
Money expert Clark Howard loves HSAs because any money in your account that you don’t use for today’s health care expenses grows over time. It can be tapped for future health expenses even in retirement.
“HSAs are really neat. They are both a tax-advantaged and tax-free savings account for medical expenses,” Clark says. “It is a great deal under the tax code.”
Table of Contents
- How a Health Savings Account Works
- HSA Eligibility
- Contribution Limits for HSAs
- How to Use an HSA
- HSA Investment Choices
- Eligible Expenses for HSAs
- HSA vs. FSA: Which Is Better?
How a Health Savings Account Works
HSAs consist of two parts:
- A qualified high deductible health insurance policy with a premium that’s typically lower than traditional insurance
- A tax deductible investment account owned by you
With an HSA, you are the one bankrolling a doctor’s visit for the sniffles or an annual checkup. You decide what you’ll pay out of pocket for — essentially acting as your own insurer — and what you want to submit as a claim through your high deductible insurer.
So, we’ve established that you can only contribute to a health savings account if you have a high deductible health plan. That’s generally the kind of health plan that only covers preventive services before the deductible.
The Internal Revenue Service has exact definitions of what qualifies as a high deductible health plan. Here are the current eligibility requirements for a high deductible plan to work in concert with a health savings account:
|Minimum deductible on individual policy||$1,350||$1,400|
|Minimum deductible on family policy||$2,700||$2,800|
|Maximum annual out-of-pocket expenses on individual policy||$6,750||$6,900|
|Maximum annual out-of-pocket expenses on family policy||$13,500||$13,800|
Contribution Limits for HSAs
In addition to caps on minimum and maximums for deductible and out-of-pocket expenses, there are also caps on what you can contribute to your health savings account each year.
Those who are 55 or older can contribute an additional $1,000 more to their HSA each year.
Meanwhile, you can always stay up to date with the latest contribution limits for HSAs on HealthCare.gov.
How to Use an HSA
HSAs let you save money for health care expenses pre-tax. If your employer offers a health savings plan, you’ll typically have money taken out of your check before taxes and deposited into your HSA.
Either way, the money in the account earns interest tax-free. You can spend it on deductibles, copayments, coinsurance and other medical expenses tax-free.
The investment account is yours and is 100% vested. Contributions made by you and/or your employer are fully tax-deductible to you. Even better, investment growth is not taxed while it is in the account.
(Editor’s note [Clark.com]: Although HSAs are tax-free at the federal level, some states do tax contributions to HSA accounts. Talk with a tax professional to understand how an HSA would work best with your unique situation.)
So ultimately, you can even use a health savings account as a supplemental retirement account.
How much could an HSA help you out in retirement if you don’t touch the money?
Let’s say a 45-year-old person who never had an HSA before starts contributing $200 a month for the next 20 years. With an average annual return as low as 3%, that money would grow to be $65,000 by age 65. You can play around with your own calculations on this free HSA calculator.
In addition, once you reach retirement age, you can use the funds for expenses not paid by Medicare: deductibles, co-insurance and even Part B and Part D premiums.