When working with a financial advisor for your retirement planning, they may suggest that you open a Health Savings Account (HSA). But what exactly is a health savings account, and how can it benefit you – both in retirement and for health-related expenses?
A health savings account is similar to a personal savings account in that it’s a financial account where you can save money. However, while a personal savings account is more for general purposes, the funds in your HSA are strictly for healthcare-related expenses. These costs can include doctor or hospital bills, dental and vision expenses, and even prescriptions.
You may ask yourself why you should bother opening an HSA when you can use your personal savings to cover medical expenses. In short, health savings accounts come with significant tax advantages that can benefit you for years to come.
How Does a HSA Work?
Similar to a traditional IRA or 401(k), you can make pre-tax contributions to your HSA throughout the year - reducing the amount of income tax you pay. In previous years, annual contribution limits were set at $3,650 for individuals and $7,300 for families. If you are over 50 years of age, you’re allowed a $1,000 annual catch-up contribution. These amounts can change annually, so it’s important to check each year’s current contribution limit.
Whenever you receive a bill or encounter an out-of-pocket medical expense (not including your monthly insurance premium), you can use the funds in your HSA to cover these costs. Think of your HSA as a savings account solely for medical expenses.
Who Can Qualify for a HSA?
To qualify for a health savings account, you must have a High Deductible Health Plan (HDHP) either through your employer or your own individual or family plan, and you cannot be enrolled in Medicare.
While “high deductible” may sound significant, most health insurance plans now fall into this category due to rising healthcare costs. In previous years, deductibles on these plans ranged from at least $1,400 for individuals or $2,800 for families to an out-of-pocket maximum of $7,050 for individuals and $14,100 for families. As long as your plan meets the current criteria, you can open an HSA. Typically, your insurance plan details will state whether or not it is HSA eligible.
The Benefits of a HSA
While HSAs are known for their tax savings, there are many reasons you should consider adding a health savings account to your retirement plan.
Tax savings. Health savings accounts offer three significant ways to save on current and future taxes.
Contributions made to your HSA are not subject to federal income taxes.
Earnings realized on funds within your HSA are tax-free, allowing your funds to grow unburdened by taxes.
Withdrawals are also tax-free if they are for eligible (medical) expenses.
Funds set aside. Should unexpected medical expenses arise, you have funds available to specifically cover these costs. You don’t have to worry about using high-interest credit cards or borrowing money through other loans. In other words, an HSA is an emergency fund specifically designed for medical expenses (which also comes with significant tax advantages).
- No expiration. Your HSA rolls over annually. Therefore, the funds will never expire.
- Transferable. Even if you switch jobs, you can keep your HSA – as long as you have a High Deductible Health Plan. If your new job doesn’t offer an HDHP, your funds will still be available to use, but with limited tax benefits.
But What If I’m Healthy?
A common question, especially among younger people, is why they should open an account for medical expenses if they’re currently healthy. First, you never know when medical expenses will pop up. It’s better to be prepared than to have to worry after-the-fact how you will cover those costs.
Secondly, the funds in your HSA roll over annually and will never expire. While you may not need the funds now, everyone ages. Heading into retirement with tax-advantaged funds set aside for medical costs is a wise strategy everyone should consider.
We’re Here to Help!
Health savings accounts are unique accounts that provide many significant tax and financial benefits. If you’re interested in learning more about HSAs or would like to open an account, we’re ready to help.
Please stop by any of our convenient branch locations or call 248-322-9800 extension 5 to get started today.
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