The Powerful HSA: All the Benefits of a Health Savings Account Today and Into the Future

A Health Savings Account, also known as an HSA, can be a very beneficial tool to pay for medical expenses. The accounts have been around since 2003 and are a great option if you have high deductibles on your health insurance plan. 

In this guide, we’ll discuss all of the Health Savings Account benefits, including saving money on your taxes, getting more out of each paycheck, and supplementing your retirement savings.

What is a Health Savings Account and how does it work?

Health Savings Accounts (HSA) help individuals and families simplify their finances and save on healthcare costs. You can deposit pre-tax income into an account and use the funds towards medical expenses, such as doctor visits and prescription medicines, when you enroll.
Depending on your needs and employer benefits, you may have an employer-sponsored HSA or an individual HSA. 

The employer-sponsored plans are a way for employers to offer employees an extra benefit for health care. However, individuals who want to take advantage of the benefits can open accounts even if it’s not offered through their employer.

Benefits of a Health Savings Account

HSAs are not just an effective way to save money. They’re also an investment in your health and your future. Here are some Health Savings Account benefits.

You reimburse yourself for expenses

HSAs are an excellent savings vehicle. You can withdraw the funds at any time to reimburse yourself for medical costs. Plus, you won’t pay taxes on the money if you use it to pay for eligible expenses.

Many expenses are eligible

The cash can only be used for HSA qualified expenses. You can use the funds to pay for health care, dental, and vision costs for you, your spouse, and eligible dependents such as children, siblings, or parents.

You can take it with you

Your HSA account stays with you if you change health insurance plans or employers. Even if you retire, the funds remain available for future qualified medical expenses.

In this way, an HSA is similar to a bank account. You control when and how to use the money you built up.

It’s convenient to use

When you open an HSA, you typically get a debit card. A debit card is a convenient way to pay for prescription medications and other medical expenses right away. If you receive a medical bill, you can even make payments over the phone, online, or by mail using a debit card.

Others can contribute to your account

Health care costs can be expensive. But you aren’t the only one who can fund your HSA. Besides your contributions, deposits can be made by your employer, a relative, or anyone else who wants to pitch in.

There are some limits — the IRS has a Health Savings Account contribution limit in 2021 of $3,600 for individuals and $7,200 for families. If you’re 55 or older by the end of the year, you can add another $1,000 as a “catch-up” contribution.

You fund it with pre-tax dollars

Health Savings Account tax benefits are great, too. Typically, you deposit the funds into your HSA through a payroll deduction at your employer. Because your gross income doesn’t include the money you add to your HSA, you don’t pay federal income taxes on your HSA contributions.

Tax-deductible after-tax contributions are available

You can also add to your HSA using after-tax dollars. In that case, you can deduct the contributions from your gross income on your tax return — reducing your annual tax bill.

For example, suppose you contributed $2,600 to your HSA through payroll deductions. The IRS allows a maximum contribution of $3,600, so you choose to deposit an additional $1,000 to your account. You can deduct the extra $1,000 when filing your taxes to lower your tax liability.

It rolls over from year-to-year

One of the biggest HSA benefits is its ability to roll over the funds from one year to the next. The annual rollover offers more flexibility than a Flexible Spending Account (FSA). FSAs are generally a “use it or lose it” plan because strict guidelines limit the amount you can carry over to the next plan year.

The funds can support your future retirement

There’s no Health Savings Account rule that specifies when you have to use your HSA money. The funds roll over from year to year, so there’s no rush to spend it. In fact, the tax-advantaged account could be an excellent way to save for retirement.

Traditional retirement savings accounts like a 401(k) or IRA require you to withdraw funds when you reach a certain age. But HSAs don’t have that requirement. Your HSA money can sit untouched for as long as you’d like, allowing you to use it during your working years or save it to cover medical expenses in retirement.

Once you reach age 65 and enroll in Medicare you can use any accumulated balance in your HSA account to help pay for deductibles, coinsurance, copayments, and other medical expenses. This is a significant advantage to fully funding your HSA each year while you're working. This strategy allows you to start saving for your health insurance and medical costs in retirement completely tax free. After housing costs, healthcare is likely to be one of your biggest retirement expenses. It makes sense to start saving now if you can.

What is the downside of an HSA?

HSAs are portable and offer tax advantages, but there are a few drawbacks to consider before you open an account. 

To qualify, you must have a high-deductible health plan (HDHP). A health plan is an HDHP if it has a deductible of at least $1,400 for an individual or $2,800 for a family, according to the IRS 2021 guidelines. Choosing the right health insurance isn’t easy. Even with the help of an HSA, you could face a significant financial burden from hefty medical bills — and it’s why some think HSA is a bad idea.

While most HSA withdrawals are tax-free, you’ll pay taxes if you use the money for non-qualified expenses — you could also be charged a 20% penalty. You must keep receipts to show the funds were used for eligible health expenses (a necessary step if the IRS ever audits you).

How to make the most of your HSA

The best way to make the most of your HSA is to work with a financial planner, and we’re here to help. If an HSA sounds like something that would work for you and your family, we encourage you to contact us today. 

You don’t have to be rich to work with us — we believe everyone deserves access to quality advice that helps them achieve their goals. So, no matter how much money you make, what kind of investments you want, or where your life is headed, we want to help you build a brighter future.

Andrew Comstock, CFA