Health savings accounts, also called HSAs, were created in 2003 to help consumers manage high out-of-pocket medical costs and are offered by a variety of banks and financial institutions when you’re covered by a qualified high-deductible health plan. HSAs are loaded with money-saving tax benefits, but only 8 percent of Americans have one, according to a survey from InsuranceQuotes.com.
No matter your opinion of the Affordable Care Act, known as Obamacare, or the future of healthcare reform, it’s important to take advantage of every opportunity to cut medical costs.
Here are five ways using an HSA saves money and can even supplement your retirement savings.
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1. Pay lower health insurance premiums. The main requirement for making contributions to an HSA is being covered by a qualified high-deductible health plan (through an employer or on your own). Insurance deductibles and premiums work like a seesaw: When one goes up, the other goes down. In exchange for taking more financial risk in the form of a higher deductible, insurers reward you with lower premiums.
For 2017, the minimum annual deductible for an HSA-qualified plan is $1,300 for an individual or $2,600 for family coverage. So, if your health insurance requires you to pay at least that much out-of-pocket, it’s likely that you can contribute to an HSA. However, some policies with high deductibles may actually be too benefit-rich to qualify, so check with your insurance company.
2. Get a tax deduction for your contributions. You may know that contributing to a 401(k) retirement plan at work or to a traditional IRA allows you to build up savings on a pre-tax basis (or by deducting contributions from your taxable income). While HSAs aren’t technically retirement plans, they do have similarities.
One is that if you get an HSA through work, your employer can deposit pre-tax dollars directly from your paycheck. Or if you make your own contributions, you can claim them as deductions when you file your tax return. Either way, every dollar you put into an HSA reduces taxable income, which cuts the amount of tax you must pay.
For 2017, individuals can contribute up to $3,400 to an HSA, or if you have family coverage, up to $6,750. These amounts are reviewed annually and can be changed to reflect cost-of-living adjustments.
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3. Receive tax-free interest and investment earnings. Another similarity between HSAs and retirement accounts is that your money grows tax-free. Depending on where you open your account, you may have the option to earn interest or even invest using a menu of mutual funds.
Unlike with a regular bank savings or a brokerage account, growth inside of an HSA rolls over from year to year without triggering an annual tax liability. And just like with a retirement account, you can sell investments without having to pay the capital gains tax when you make a profit.
Even if you’re offered an HSA through your employer, you don’t have to use it. You can open an account at any financial institution you choose. So shop around and find an account that’s easy to use, pays interest, charges low fees and offers the option to invest your contributions.
4. Make tax-free withdrawals to spend on qualified medical expenses. The biggest benefit and what makes an HSA so special is that you can take money out at any time to pay for a wide variety of qualified medical expenses completely tax free. HSAs are one of the few accounts that give a tax break upfront for putting money in (like a traditional retirement account) and when money is taken out (like a Roth retirement account).
As long as you use HSA funds on qualified medical expenses, you get all these benefits. But if you spend it on a vacation or a car, you could face having to pay income tax, plus an additional 20 percent penalty.
And there’s no rush to empty your account because HSA funds can accumulate year after year if you don’t spend them. Interestingly, after you reach age 65, this steep penalty disappears.
That means if you make withdrawals for non-qualified medical expenses (like a vacation or car) they’re subject to income tax, but not a penalty — similar to a traditional IRA or 401(k). So, you can use an HSA to boost your retirement savings.
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5. Purchase a wide variety of goods and services tax free. Worried that you won’t be able to spend your HSA money? There are plenty of approved expenses you’d expect, like copays for doctors’ visits, emergency room services and prescription drugs. But there are also many qualified expenses you might not expect:
— Abortion
— Acupuncture
— Birth control
— Drug and alcohol addiction treatment
— Dental care
— Home improvements to accommodate a medical condition
— Chiropractor
— Contact lenses and eyeglasses
— Hearing aids
— Fertility treatment
— Psychiatric care
This is not a complete list, so for more information refer to IRS Publication 969.
Why health savings accounts make financial sense. Depending on your income tax rate, using an HSA to pay for medical expenses means you could get a discount of 20 percent or more. And if you don’t spend all your savings, they roll over penalty-free indefinitely. Reaching age 65 with money still in the account is terrific because it simply becomes a supplement to your retirement plans.
Having a high-deductible health plan isn’t for everyone. They mostly benefit healthier consumers, who aren’t likely to spend the full deductible each year. But if it’s a more affordable option for you and your family, don’t miss out on all benefits you get by pairing it with an HSA.
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5 Ways to Get the Most Value From Your HSA originally appeared on usnews.com
