- If you have a high-deductible health insurance plan, you may qualify to open a health savings account.
- HSA contributions per year are limited based on whether you have an individual health plan or a family plan.
- It's worth adding as much money as you can to your HSA, due to its flexibility and its potential to become an extra retirement account.
HSAs have more perks than you may realize.
Health savings accounts, or HSAs, are a special type of savings account that holds money put aside for medical expenses. Not everyone is eligible to open one, however; you must be enrolled in a high-deductible health insurance plan. This means that in 2022, if you have only individual coverage, your annual deductible must be at least $1,400 (with an annual out-of-pocket expense capped at $7,050). If you have family coverage, though, the numbers double. Your annual deductible needs to be at least $2,800 and out-of-pocket expenses capped at $14,100.
You're also not allowed to have any other health insurance coverage (with a few exceptions, including dental and vision insurance). And you're not allowed to have a flexible spending account either. FSAs and HSAs are sometimes confused; a healthcare FSA allows you to put aside a certain amount of money (up to a limit) to cover medical expenses for a given year. Often, you can't carry that money forward and must spend all that you've put in before the end of the year.
Here's the neat thing about HSAs: They're funded with pre-tax money. The annual maximum contributions allowed by the IRS (individual health plan: $3,650; family plan: $7,300; you can add $1,000 more if you are over age 55) will be taken right off the top of your gross salary earnings. The tax advantages don't stop there: HSA withdrawals are tax-free (if you use the money for qualifying medical expenses), and if you choose to invest your HSA funds (see below), your investment gains will also be tax-free.
So, you've checked with your health plan's administrator, and you're eligible to open an HSA. Hooray! Here's why you should contribute as much as you can.
1. HSAs are flexible
HSAs offer excellent flexibility, which is something you can't necessarily say about a lot of financial products. You get to decide how much money you want to put in (up to the limits we discussed above). If you start off the year by putting in $300 a month, and then you decide you need to cut back on those contributions for whatever reason, you can. Or if you think you can only afford to add $150 a month, then you get a raise at work, you can boost that contribution. You can carry money forward in an HSA, year after year. And you might even be able to invest it!
2. HSAs can become an additional retirement account
That's right -- you may also be allowed to invest the money in your HSA. This will depend on where you open your HSA; if it's held by a bank, you might be limited to just earning interest on the contributions in the account. But if you start an HSA through a brokerage, you will likely be allowed to invest in stocks, bonds, and ETFs if you have a certain minimum balance. And you won't have to pay taxes on your investment profits. Since your contributions are pre-tax, and your medical expense withdrawals are tax-free, HSAs offer a triple tax benefit. In short, an HSA can become another retirement account, if you've already maxed out your standard retirements, like a 401(k) or an IRA. Wow!
As you can see, it's worth it to max out your HSA contributions. How often do you get to take advantage of such a flexible and beneficial financial vehicle?
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