Welcome to your ultimate guide on Health Savings Accounts (HSAs). HSAs are a tax-advantaged financial tool designed to help individuals and families save money on medical expenses.
What is an HSA?
An HSA is a type of savings account that allows you to set aside pre-tax dollars specifically for healthcare expenses. These funds can be withdrawn tax-free to pay for qualified medical expenses, such as doctor visits, prescription drugs, and medical procedures.
Who is eligible for an HSA?
To be eligible for an HSA, you must meet the following requirements:
- You are covered by a high-deductible health plan (HDHP)
- You do not have any other health coverage (with certain exceptions for accident, disability, dental, vision, or long-term care insurance)
- You are not enrolled in Medicare
- You cannot be claimed as a dependent on someone else’s tax return
What are the benefits of an HSA?
There are several benefits to opening an HSA, including:
- Pre-tax contributions reduce your taxable income
- Tax-free withdrawals for qualified medical expenses
- Unused funds roll over from year to year
- Portability – you can take your HSA with you when you change jobs or retire
- Investment options for long-term growth potential
How much can you contribute to an HSA?
For 2021, the annual contribution limit for an individual with self-only coverage is $3,600, and for an individual with family coverage, it is $7,200. If you are 55 or older, you can make an additional catch-up contribution of $1,000 per year.
What are qualified medical expenses?
Qualified medical expenses include a wide range of healthcare-related costs, such as:
- Doctor visits
- Prescription drugs
- Dental and vision care
- Hospital services (including room and board)
- Physical therapy
For a complete list of qualified medical expenses, see IRS Publication 502.
How do you open an HSA?
You can open an HSA through a bank, credit union, or other financial institution that offers HSA accounts. Your employer may also offer an HSA as part of your benefits plan.
Can you use an HSA to pay for insurance premiums?
In most cases, no. However, there are some exceptions, such as:
- COBRA continuation coverage
- Qualified long-term care insurance premiums
- Healthcare coverage while receiving unemployment benefits
- Medicare premiums (except for Medicare supplement policies)
What happens to your HSA if you change jobs or retire?
Your HSA is portable, which means you can take it with you when you change jobs or retire. You can continue to use the funds for qualified medical expenses or invest them for long-term growth.
What happens to your HSA when you die?
If you designate a spouse as your HSA beneficiary, the account becomes their HSA upon your death. If you designate a non-spouse beneficiary, the account is no longer considered an HSA and is subject to taxes.
Can you have an HSA and an FSA?
Yes, but only under certain circumstances. You can have both an HSA and a limited-purpose FSA (which is restricted to specific expenses such as dental and vision care). You cannot have a general-purpose FSA and an HSA at the same time.
Can you contribute to an HSA if you have other insurance?
It depends on the type of coverage you have. If you have any of the following types of coverage, you are not eligible to contribute to an HSA:
- General-purpose FSA
- Health Reimbursement Arrangement (HRA)
- Medicare
- Tricare
Are there any fees associated with an HSA?
There may be fees associated with an HSA, such as account maintenance fees and investment fees. However, these fees are typically lower than those associated with other types of healthcare accounts.
Can you invest your HSA funds?
Yes, many HSA providers offer investment options for account holders. You can invest your HSA funds in stocks, bonds, mutual funds, and other securities for potential long-term growth.
Can you use your HSA to pay for non-medical expenses?
Yes, but you will be subject to taxes and penalties. If you withdraw funds for non-medical expenses before age 65, you will be subject to income taxes and a 20% penalty. After age 65, you will only be subject to income taxes on non-medical withdrawals.
What happens if you over-contribute to your HSA?
If you contribute more than the annual limit to your HSA, you will be subject to an excess contribution tax of 6%. To avoid this penalty, you can remove the excess funds (and any earnings on those funds) before your tax-filing deadline for that year.
Can you change your HSA contributions during the year?
Yes, you can change your HSA contributions at any time during the year, as long as you do not exceed the annual contribution limit.
What are some best practices for using an HSA?
Here are some tips for making the most of your HSA:
- Maximize your contributions (up to the annual limit)
- Use your HSA funds for qualified medical expenses
- Take advantage of investment options for potential long-term growth
- Keep receipts and documentation of medical expenses
- Plan ahead for healthcare expenses to avoid unexpected withdrawal needs
Conclusion
An HSA can be a valuable tax-advantaged tool for managing your healthcare expenses. By maximizing your contributions, investing for long-term growth, and using your funds wisely, you can make the most of this powerful financial resource.
FAQs
1. Can you have an HSA if you have a low-deductible health plan?
No, to be eligible for an HSA, you must be covered by a high-deductible health plan (HDHP).
2. Can you use your HSA to pay for cosmetic procedures?
No, cosmetic procedures are not considered qualified medical expenses.
3. Can you contribute to an HSA if you are unemployed?
No, you must be covered by an HDHP to contribute to an HSA.
4. Can you use your HSA to pay for your child’s medical expenses?
Yes, you can use your HSA funds to pay for qualified medical expenses for your dependents.
5. Are HSA contributions tax-deductible?
Yes, HSA contributions are tax-deductible (or pre-tax if made through a payroll deduction).
6. Can you use your HSA to pay for over-the-counter medications?
Yes, as of 2020, you can use your HSA funds to pay for over-the-counter medications without a prescription.
7. Can you open an HSA if you are self-employed?
Yes, if you are covered by an HDHP, you can open an HSA.
8. Can you contribute to an HSA for previous tax years?
No, you can only contribute to an HSA for the current tax year.
9. Can you use your HSA to pay for acupuncture or chiropractic services?
Yes, as long as those services are considered qualified medical expenses.
10. Can you use your HSA to pay for dental work?
Yes, dental procedures are considered qualified medical expenses.
