What are Health Savings Accounts and How Should They Be Used?
A Health Savings Account (HSA) provides an efficient way for covered individuals to pay out-of-pocket health insurance expenses. The key benefit of an HSA is that it allows people to put away a portion of their paycheck without being taxed. Many people consider it to be one of the most efficient ways to save, regardless of whether a person is saving for a catastrophe or their long-term future. It can be helpful to learn more about how HSAs are commonly used to see if this option is right for you.
Income and Deductibles
Typically, those who opt for HSAs have high deductibles that they likely wouldn't be able to pay if they didn't make provisions over time to do so. For example, if a person makes $30,000 a year after taxes and has a $6,000 deductible, then they would be giving up a full 20 percent of their income if they had major medical expenses.
HSAs are commonly offered by health insurance companies, so an individual can sign up for an account while signing up for their health insurance plan. The government is incentivizing policyholders to prepare for emergencies so there are fewer delinquent policies. If your insurance policy doesn't offer an HSA option, it's possible to open a separate account at another financial institution.
Reducing Your Taxable Income
Having money taken out of your income tax-free is a way to reduce the amount of taxable income you make in a year. This can help you maximize your income while simultaneously safeguarding against emergency health situations. Individuals who contribute $2,000 a year to their HSAs will be taxed as though they make $2,000 less than their standard income. The money that is contributed to an HSA will roll over from year to year, which means that the insured can grow their emergency funds over time. While these funds typically can't be used to pay for insurance premiums, they can be used for co-pays, deductibles, and other eligible non-covered expenses.
Maximum Restrictions
The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. The maximum for 2024 is $4,150 for an individual and $8,300 for a family.1 Adults over the age of 55 are allowed to contribute an additional $1,000 in catch-up contributions. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and family members are allowed to contribute to an HSA on behalf of the insured. The contribution limits for employers generally change each year as well.
How to Use It
Some people use their HSAs as straight savings accounts, while others may choose to invest their money in mutual funds or stocks. In fact, some financial experts view investing in an HSA as a better financial move than investing in a typical retirement account. When it comes to IRAs, individuals are required to withdraw from their accounts once they reach the age of 73, but HSAs allow people to continue contributing tax-free with no such requirement. The income deposited into an HSA is also not subject to the FICA tax that goes toward Social Security and Medicare, whereas an IRA would be subject to this additional tax. Furthermore, an HSA can be used for non-eligible expenses, though it will be taxed as income if the insured chooses to do so.
An HSA can be helpful for anyone who strives to pay their health insurance expenses immediately. While HSAs may be more commonly chosen by those with high deductibles, the truth is that practically anyone can benefit from the associated tax-free incentives if they so choose.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.