Medical bills are among the largest and most unpredictable expenses, making savings accounts related to healthcare a critical component of a financial plan. The government has programs in place that allow us to save money for medical expenses through Health Savings Accounts, or HSAs. So, what exactly is HSA? This article will go into greater detail, including information beyond the definition, such as the benefits it provides to account holders. 

What is a Health Savings Account (HSA)?

An HSA is a tax-advantaged savings account designed specifically for qualified healthcare expenses. Health savings accounts allow you to use your pre-tax dollars to pay for a range of medical expenses, such as doctor visits, prescriptions, medical equipment, and more.  

However, it is important to note that opening a Health Savings Account requires enrolling in a High-deductible Health Plan (HDHP). This article will discuss the qualifications in more detail later. 

Key Features of an HSA

As we briefly mentioned earlier, a Health Savings Account provides numerous tax advantages. 

Contributions into HSA are tax-free, reducing your taxable income as it qualifies as deductions. Furthermore, the funds you deposit into the account will grow over time through investment and interest, and this growth of earnings is also exempt from taxes. Finally, withdrawals from HSA allow you to use the funds for qualified medical expenses without paying taxes on those withdrawals. These combined tax advantages make HSA an effective tool for saving money on healthcare and provide opportunities to earn more through investments and interest. 

Who is Eligible for an HSA?

Must be enrolled in a qualifying HDHP: Applicants must be registered in a high-deductible health plan that meets the IRS’s deductible and out-of-pocket maximum requirements. 

Cannot be covered by other non-HDHP Insurance: You must not be covered by any other health insurance plan that is not an HDHP. However, there are some exceptions, such as dental and accident insurance coverage. 

Cannot be claimed as a dependent on someone else’s tax return: If you are claimed as a dependent on someone else’s tax return, such as your parents’, you will be ineligible for a Health Savings Account.  

Benefits of a Health Savings Account

Tax Advantages

HSAs’ triple tax benefits provide a unique opportunity for those looking to save money for healthcare expenses without paying additional taxes. This means you won’t have to worry about paying taxes on HSA transactions because deposits and withdrawals are tax-free. Instead, contributions are considered deductions, which, in effect, can lower taxable income.

Portability and Flexibility

Unlike other health accounts, HSAs give you full control and flexibility. Whether you are changing jobs or retiring, your account is not connected to your employer or insurance company. The funds will stay with you. Moreover, HSAs provide many essential medical expense options, including dental, vision, prescriptions, and more. 

Long-Term Savings

HSA is also an excellent tool for long-term fund growth. You can achieve tax-free growth through interest and various investment programs. Furthermore, funds in HSAs do not expire. Any unused funds will roll over to the following year, allowing you to continue growing your investment. 

Maximizing Your HSA

1. Use It for Qualified Medical Expenses

Funds in Health Savings Accounts are designated specifically for qualified medical expenses. These qualified medical expenses include doctor visits, such as check-ups, consultations, and medical treatments; dental and vision care, such as cleaning, filings, eyeglasses, and eye exams; medical equipment, such as blood pressure monitors, crutches, wheelchairs, and other medical expenses, such as mental health services and preventive care, such as vaccinations. As you can see, HSA allows you to spend funds on many essential medical care items. 

2. Invest Your HSA Funds

When you have an HSA, take advantage of one of its primary features: the ability to grow your funds. You can increase your balance by investing your money in mutual funds, stocks, and bonds. Any interest or investment gains are tax-free, so your money will compound more effectively over time. 

3. Save for the Future

As we age, our health becomes more vulnerable. This is why it’s crucial that you contribute to your HSA as you go along, producing long-term savings that can prove beneficial for large future medical expenses or retirement healthcare costs. Remember, your funds in HSA cannot expire. The funds you don’t use will roll over and continue to grow.   

HSA vs. Other Savings Options

HSA vs. Flexible Spending Account (FSA)

Unlike HSAs, a Flexible Spending Account (FSA) has a different policy regarding fund expiration. While an HSA doesn’t have an expiration date, an FSA, on the other hand, applies a “use-it-or-lose-it” policy, which means any unused funds left at the end of the year will typically be forfeited. Therefore, if long-term savings is the goal, the HSA has the upper hand. 

HSA vs. Traditional Savings Account

In a traditional savings account, any interest earned on the money you deposit is subject to taxes. With an HSA, all growth, including interests, is tax-free, making saving and investing your funds more efficient. 

HSA vs. 401(k) or IRA

Unlike withdrawing from HSAs, which are tax-free, withdrawals from these two savings accounts are taxed. 401(k) or IRA are savings accounts primarily designed for retirement, and we know one of the biggest spending in retirement is healthcare costs. Therefore, having an HSA along with a 401(k) or IRA can strengthen your retirement strategy by providing a well-rounded savings account that covers both medical expenses (through HSA with tax-free advantages) and using a 401 (k) or IRA for other living costs in retirement. 

Common Mistakes to Avoid with HSAs

The first crucial mistake with HSAs is not using the funds for qualified medical expenses. If you make withdrawals that are not medical-related before the age of 65, you will face penalties and taxes on the withdrawals. Ensure that the expense is HSA-qualified before you withdraw.

The second mistake people make with Health Savings Accounts is not maximizing annual contributions. The annual contribution limits for HSAs are $4,150 (for individuals) and $8,300 (for families). Contribute as much as possible so you don’t miss out on the tax savings and tax growth that will benefit your future healthcare fund. 

How Butson Financial Advisors Can Help You Maximize Your HSA

A Health Savings Account is one of the best savings options because it offers unique benefits, including tax-free advantages, investing and growing your balance, and saving up on medical bills. If you want to open an HSA account, Butson Financial Advisors can help you assess your eligibility, apply for the account, and strategize your funds so that you can maximize the benefits that a Health Savings Account provides. We are committed to assisting you in making informed financial decisions in order to establish a solid foundation for financial stability and security. 

Contact our team to begin your journey of saving for medical expenses and building your finances for a better future.