What Is An HSA And How Does It Work?
In 2021, 20% of American adults had unexpected medical expenses that averaged between $1,000 and $1,999, according to a finance survey. This is why it is so crucial to have an emergency fund. An HSA could be a great way to cut down on medical expenses.
A health savings account, or HSA, is a tax-advantaged account specifically for healthcare costs and its goal is to encourage account holders to save money for routine medical expenses and emergencies in the future.
HSAs have become quite popular and millions of people have opened accounts. Here’s some information to help you get your own HSA so you can be prepared for those emergency expenses.
Who Qualifies For An HSA?
If you’re enrolled in a high-deductible health insurance plan, you qualify to open an HSA. Your deductible, or out-of-pocket expenses, must be at minimum $1,350 for one person, and $2,700 for families.
There are many employers who offer their employees the chance to open an HSA if they’re enrolled in their high-deductible insurance plan.
You can open an HSA through a bank or other financial institution if your employer doesn’t provide it. Anyone, including family members, can contribute to your account.
What Are The Benefits?
Depositing pre-tax money from your paycheck is one of the best ways to fund your HSA. Additionally, your employer might make contributions to your account.
One great benefit of an HSA is that whatever money is in your account does not count toward taxable income. This could provide some welcome savings when tax season rolls around.
Your HSA funds are tax-free if they’re used for qualified health care expenses. You can also use mutual funds or other means to grow your money without worrying about potential tax consequences.
Your money in an HSA is safe long-term because it doesn’t expire at the end of the year like flexible spending accounts (FSAs).
How To Utilize An HSA & Contribution Limits
Your HSA comes with a linked debit card or blank checks. You can choose to pay out of pocket and get reimbursed later or pay upfront using a debit card or check.
HSA funds can cover the cost of chiropractor visits, service animal care, glasses, and other copays and deductibles.
Keep in mind that insurance premiums and nonmedical bills can’t be covered by HSA funds. If you attempt to use the funds for any nonmedical expenses, you could be taxed on the withdrawn funds and pay fines.
HSA contributions have an annual cap. In 2021, an individual could deposit a max of $3,600, $4,600 for account holders 55 and older, and $7,200 for a family. Amounts will slightly increase in 2023; $3,650 for one person, and $7,300 for a family.
Is An HSA The Right Choice For Me?
Considering the many advantages of an HSA, it isn’t necessarily the best fit for everyone. Even with an account, meeting high deductible expenses can still be hard.
Take note that some banks charge fees for these accounts, ranging from monthly fees to usage fees. The fees can be waived if you keep a minimum balance, which encourages account holders to continue saving. The downside is it could also discourage people from spending any funds for expenses when they need to.
However, saving money for an emergency is better than not doing so. Every little bit can help. This will give you a bit of a cushion in case an unexpected medical expense pops up. It could also be wise to shop for other health insurance plans, which could bring down expenses and put a little more money in your pocket.