15 Things You Need to Know About Health Savings Accounts

Health savings accounts, or HSAs, may not be the most commonly used savings plan. But there are many benefits to socking money away in an HSA. Here are a few things you should know about these plans if you're not yet familiar with them.

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HSAs are useful savings tools, but unfortunately, they're off the table for those not enrolled in a high-deductible health insurance plan. This year, that's defined as an individual deductible of at least $1,400 for self-only coverage, or $2,800 for family coverage.

ALSO READ: Move Over, 401(k)s: HSAs Are the New Retirement Trend

Just as the annual contribution limits for IRAs and 401(k) plans can change from one year to the next, so too can HSA limits change. Right now, these limits stand at $3,650 for self-only coverage and $7,300 for family coverage, but that could change in 2023.

Retirement savers may be familiar with catch-up contributions in IRAs and 401(k)s. Similarly, HSAs allow a $1,000 catchup for older savers. But unlike IRAs and 401(k)s, where catchups begin at age 50, with HSAs, they don't kick in until age 55.

The upside of funding a traditional IRA or 401(k) is getting a tax break on contributions. HSAs work similarly in that contributions are made on a pre-tax basis.

ALSO READ: 3 Tax Breaks Every Investor Can Get

If you've ever had a flexible spending account, you're no doubt aware that funds not used before your plan year expires are forfeited. With HSAs, there's less pressure, because you can withdraw your funds at any time.

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When you fund a flexible spending account, your money just sits in your account until you incur expenses and take withdrawals. With an HSA, you can invest the money you aren't using so it grows into a larger sum.

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Not only can you invest HSA funds you don't need right away, but any gains you score in your account will be yours to enjoy tax free. For this reason, it's good to try to not spend your entire HSA balance year after year, but rather reserve funds in your account that can stay invested for the long haul.

Just as withdrawals from a Roth IRA or Roth 401(k) can be taken tax free, so too are HSA withdrawals exempt from taxes. This only applies, however, if you use that money for qualified healthcare expenses.

ALSO READ: What Will Healthcare Cost You in Retirement? Prepare to Be Shocked

HSAs offer a host of tax benefits, but the flip side is that if you remove funds for nonmedical purposes, you'll be hit with a steep 20% penalty. That's double the penalty for taking an early withdrawal from an IRA or 401(k).

Once you turn 65, you can withdraw money from your HSA for any reason and avoid penalties. You'll pay taxes on nonmedical withdrawals, but that's no different from the taxes imposed on traditional IRA or 401(k) withdrawals.

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HSA contributions are made on an annual basis, but you can put money into your HSA beyond a given calendar year. If you want to max out your 2022 HSA, for example, you have until the 2023 tax-filing deadline to put money into your account.

Many companies offer employees the option to sign up for an HSA, similar to how they offer a 401(k). But if your employer doesn't allow you to sign up for an HSA, you can open one at any financial institution that offers them. Some companies, however, contribute to HSAs on employees' behalf, so it pays to see if this option exists.

Once you enroll in Medicare, you're no longer eligible to contribute funds to an HSA. This holds true even if you aren't paying for Medicare -- such as if you've signed up for Part A only, which is generally free, to serve as a secondary insurer to an employer plan.

While you can't fund an HSA once you're enrolled in Medicare, you can use the money you already have in your account to cover expenses like premiums, deductibles, and co-pays. These are all considered valid healthcare expenses.

ALSO READ: Medicare Costs Are Rising. Here's How to Prepare

Long-term care is an expense Medicare commonly won't cover -- and it can be very costly. Putting long-term care insurance in place can help defray the cost of a stay in an assisted living facility or nursing home. And you can use HSA funds to pay the cost of long-term care insurance premiums.

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HSAs are a uniquely advantageous savings tool because they're flexible and triple tax-advantaged. It pays to read up on how HSAs work and open one if you're eligible based on the health plan you're enrolled in.

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