It is really difficult to know if you should invest your hard-earned money in an HSA. For one, what is an HSA? How is it different from an FSA? WHAT IS AN FSA!? All the terms and acronyms can be a bit confusing for any employee, so let’s take some time to clear things up and better prepare ourselves for the future. I’m not sure about you, but I’d love to retire before I’m 80!
Let’s tackle the 9 most important things you should know concerning a Health Savings Account and how it is beneficial to you in the long-run.
What is an HSA?
An HSA is a savings account that allows employees to set aside PRE-TAX money to pay for qualified medical expenses. Some of the things considered “qualified” are deductibles, copayments, and coinsurance which can help lower healthcare costs.
Who qualifies for an HSA?
Any individual who is covered by a high-deductible health plan, not covered by any OTHER health plan, not enrolled in Medicare, and is not claimed as a dependent on a tax return is eligible to make or receive contributions to an HSA. For those who didn’t know – that would be me – a “high-deductible health plan” is a plan that has a deductible of at least $1,400 for an individual or $2,800 for a family. This includes plans from the Marketplace if they are listed as “HSA eligible.”
What are the perks?
I have to say, the perks for an HSA are pretty sweet!
a. Any contribution you make into your HSA is tax-deductible! So, keep those records to submit the deductions during tax time.
b. An HSA is tax-free. What does this mean? Well, the money you take out to pay the qualified medical expenses, mentioned in #1, in addition to dental and vision expenses, is NEVER taxed! Shocking, right!?
c. Your HSA contributions earn interest!
d. Even better…that interest is tax-deferred. What does tax-deferred mean? A tax-deferred status refers to investment earnings (interest) that accumulate tax-free until the person investing takes possession of the profits. Find out more about the advantages of tax-deferred plans here.
e. It’s YOURS! If you don’t use all your funds in a year, all is not lost! Those funds will roll over and continue to grow, tax-deferred!
What is the difference between an HSA and an FSA?
Okay, so we know that an HSA is a “health savings account,” and in case you didn’t know, and FSA is a “flexible spending account.” But beyond the name, what are the major differences? Here are a few of the important distinctions:
a. You can utilize an HSA even if your employer does not offer it; an FSA is only available through your employer
b. FSA’s help you save pre-tax dollars for health expenses for the current year, while HSA’s help you save pre-tax dollars for health expenses at ANY time in the future
c. If you don’t use your FSA funds you lose them! See point 3E above for HSAs.
Are HSAs available for self-employed individuals?
YES! You can enroll in an HSA as long as you qualify under the standards mentioned in #2. Contact your bank or insurer for their options, or use this search tool: https://www.hsasearch.com/
How do you contribute to an HSA?
You may choose to have your HSA contribution deducted from your paycheck, directly from your bank, or, if you still know what a check is, you can write one of those!
What are the limits for contributions?
The contribution limit per year for an individual is $3,600 and $7,200 for a family.
How do you use your HSA for retirement?
Try to avoid using your contributions at all. One of the BEST ways to use your HSA is to treat it as an investment. This triple tax-advantaged savings account (see #3, a, b, & d) can accrue funds and interest from year to year without losing any of your money. It is also very important to consider where you place your investments. Your employer makes it easy to set up an HSA but the choice of where to put your money is up to you. Make sure you shop around for a plan with high-quality/low-cost options such as Vanguard.
What if you HAVE to spend your contributions?
Only spend your HSA funds on qualified medical expenses. Distributions for these expenses are tax-free. If you spend the money on anything else before the age of 65 you will pay a penalty of 20%, plus more in income tax! Learn more about qualified medical expenses here.
If you would like more information about HSA accounts, reach out to Medcom Benefits, contact your HR department, or visit www.healthcare.gov. Now, if you will excuse me, I’ve got to go set up my HSA!
