What’s an HSA? Making the Most of Your Health Savings Account

Want to set aside money for medical expenses? An HSA account could be your new best friend.

Healthcare is a big expensive headache for most people. And that’s increasingly the case as more people find themselves with high-deductible health plans where they pay for more of their own medical costs. These plans typically have a lower monthly premium, they have increased in popularity in recent years: in 2016, 29 percent of workers were enrolled in a high-deductible health plans (HDHPs), according to the Kaiser Family Foundation.

But with some planning, there are ways to manage these higher medical costs of HDHPs. A health savings account (HSA) is a great way to set aside money for healthcare-related costs. Best of all, it’s a tax break.

What is an HSA, anyway?

An HSA is a savings account you fund with pre-tax earnings, which is money you make before taxes get taken out of your paycheck.  One of the big benefits of your HSA contributions is they actually decrease your taxable income. You can use this money to pay for qualified medical expenses. These can include things like doctor or hospital visits and prescriptions. There’s a list of all the things that are covered by your HSA, so you can plan ahead of time as to what you may need to plan for.

Individuals can contribute up to $3,400 and families $6,750 annually, as long as your HDHP has a minimum annual deductible of at least $1,300 for individuals or $2,600 for families, as set forth by the Internal Revenue Service (IRS).

What can I use my HSA for?

Think beyond checkups and medication. You can use the money you save for things including glasses or dental work or chiropractic care.

New moms can use HSA funds for breast pumps and supplies, and the cost of lead-based paint removal in your home can also count as a medical expense. It pays to thoroughly review the IRS’s official list of medical expenses.

Are there rules and restrictions on an HSA?

There are plenty of stipulations regarding which expenses can and can’t be covered using your HSA.

For example, while lab expenses, home care, and surgery is covered, monthly gym dues or cosmetic procedures are not.

Why do I need a dedicated Health Savings Account (HSA)? Can’t I just save money in my regular savings account?

You could, but you’d miss out on a major tax break. Your HSA contributions are made from pre-tax earnings, which means they decrease your taxable income.

These accounts are “triple-tax advantaged.” That means, you can put money away pre-tax. Your earnings in the account are untaxed, and when it comes time to pay for a medical expense, the money you withdraw from an account to make a payment is also untaxed. The money is already there waiting for you.

What are the rules and restrictions on an HSA?

There are plenty of stipulations regarding which expenses can and can’t be covered using your HSA. For example, while lab expenses, home care, and surgery is covered,  monthly gym dues or cosmetic procedures are not. You’ll want to check  with the this list at IRS.gov to make sure.

You also may not be eligible to fund an HSA if you have received Veteran Administration benefits recently, or are covered by another health insurance plan that doesn’t have a high deductible. The IRS has additional criteria you should review to determine your eligibility.

Don’t have a job that offers an HSA?

If you’re enrolled in an HDHP,  you can open an HSA through your financial institution and start setting aside tax-deductible contributions. Local banks, credit unions and brokerages all offer HSAs, so you should shop around to find the right one for you.

Do I need to set up an HSA through an employer? What if I’m self-employed?

If you’re insured through an employer, they may offer to open an HSA account on your behalf. If not, you can open your own HSA through your bank or financial institution, as long as you’re currently enrolled in an HDHP. Some employers make it easy to contribute to an HSA through payroll deductions. If you’re self-employed, you can make post-tax contributions and claim the deduction at the end of the year on your tax return, which should result in money back.

As you contribute to your HSA, be mindful of the yearly cap on contributions. Some employers kick in contributions to their employees’ HSAs, which is a nice perk that also counts toward your yearly maximum.

For example, if you’re an individual, your contribution limit in 2017 is $3,400. If your employer contributed $700 to your HSA at the start of the year, your own contributions cannot exceed $2,700.

If you’re enrolled in an HDHP,  you can open an HSA through your financial institution and start setting aside tax-deductible contributions. Local banks, credit unions and some brokerages all offer HSAs, so you should shop around to find the right one for you.

Important note: Watch out for monthly maintenance fees and minimum balance requirements, which can quickly eat up your savings.

If I put money in an HSA, will that interfere with IRA or 401(k) contributions?

No. You can contribute the maximum amount to  both accounts each year.

What happens to my HSA if I leave my HDHP?

If you join a health care plan that doesn’t have a high deductible, you can no longer contribute to an HSA, although you may still use your existing one to pay for qualified medical expenses.

What are penalties (one or two) for using the HSA for non-medical expenses?

If you use HSA funds for non-medical expenses, you’ll be hit with a 20% IRS penalty for the expense, plus you’ll have to pay the income tax on the transaction amount.

Can I use my HSA money in retirement?

Yes. You can also treat your HSA as an investment account. Unlike your FSA, which you need to use by the end of a year, the money in your HSA rolls over year to year. By contributing the maximum amount to your HSA until retirement, you’ll build up a pot of money that won’t be taxed when you withdraw for medical expenses. At age 65, you can also withdraw from your HSA for non-medical expenses, which means you can use the money in your account for your other living expenses. These withdrawals will be taxed just like normal withdrawals from an IRA or 401(k).

Key Takeaways:

  • If you’re eligible for an HSA, it’s a great way to put money aside for medical expenses while decreasing your tax burden.
  • It pays to study up on the expenses that can be covered by HSA money—the IRS’s list is long and includes more than just doctor’s visits and prescriptions.
  • Be mindful of the yearly limits on contributions and criteria for HSA-eligible medical expenses.
  • You can also use an HSA to help fund your retirement.

Read more: What’s Your Money Personality? Understanding Your Financial Self

Stash does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.

Lauren Sieben is a writer and journalist based in Milwaukee. She writes about money, personal finance and business, among other topics.

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