As featured in the Finances FYI section of the the Seattle Times
By 1st Security Bank
A health savings account, or HSA, can be an invaluable tool to help you save for unexpected medical expenses and lower your taxable income. Many employers offer HSA options, but it can be challenging to know what’s right for your financial goals and what you can qualify for.
Let’s cover all of the basics of health savings accounts so you can make the right choice when it comes to your savings.
What is an HSA?
Simply put, a health savings account is a bank account for your medical expenses. You decide how much money to contribute each year, and your employer will automatically deposit the funds. Funds can be used for copays, deductibles and other qualifying medical costs, but typically aren’t eligible for premiums. Your HSA savings roll over each year, so there’s no need to make unnecessary purchases to clear the balance every 12 months.
There are maximum contribution limits determined by the government, but your employer should help keep you compliant. A checkbook or debit card linked to your account will be issued and used for medical expenses that qualify. Instead of paying out of your traditional checking or savings, you’ll have the security of knowing money has already been set aside for these expenses.
How do I qualify?
Health savings accounts are specifically for people with high deductible health coverage. These high deductibles lead to substantial out-of-pocket expenses for employees, so having funds set aside expressly for this purpose is highly recommended. While many employers offer HSA options, you can shop for your own if your insurance plan qualifies.
Each year, the IRS sets parameters determining what qualifies as a high deductible plan, typically based on a minimum deductible or maximum out-of-pocket costs. You can find out if your plan is accepted by looking online or speaking with your tax professional. Whether you have a preexisting condition or just want peace of mind during a medical emergency, utilizing an HSA can help relieve the burden of high medical bills.
Tax and investment benefits
Health savings accounts also offer special tax and investing advantages for employees. The primary benefit is lowering your tax obligation with contributions. If you contribute $2,000 per year, your tax obligation will be $2,000 lower than your taxable income. If you’re saving through your employer, contributions will be considered pretax, and if you open up an account yourself, deposits are tax-deductible. There are no penalties for using these funds on eligible medical purchases, and no taxes or interest will be owed as your savings grow.
Many HSAs allow your savings to be put to work through investments after reaching certain balance thresholds. In these instances, your health savings can be used to invest in mutual funds, ETFs and even specific stocks. As long as any profits from these investments are spent on qualified medical expenses, you’ll never have to pay capital gains taxes or any other additional income tax. Using an HSA in conjunction with other investment vehicles is a great way to boost your after-tax retirement income. Instead of viewing these funds strictly through a short-term lens, you can save thousands on taxes and secure your retirement with a smart health savings plan.
Familiarizing yourself with all of the financial tools available is a surefire way to make educated choices with your money. Thorough planning and dedication to the process will ensure financial success is in your future. Whether you’re planning for retirement or want to make sure your family is covered for unexpected medical expenses, consider utilizing a health savings account to get the most out of your money.