What are Health Savings Accounts? And how can they help you?

Let’s start with the basics: What on earth is a Health Savings Account or HSA?

As its name implies, an HSA is an account that you use to save money for health expenses. So it helps you stay healthy. And—bonus!—it saves you on taxes!

Here’s how it works:

You can contribute money to your HSA on a pre-tax basis; in other words, you get a tax break just for putting money into it. Then you can use that money for qualifying* medical expenses, tax-free!

You read right: You save on taxes when you put money in. And you save on taxes when you take money out. Pretty cool!

And if, at the end of the year, you still have money in your HSA account, it rolls over into the next year. This can add up to a bunch of tax-deferred growth! Here’s a calculator from HSA Bank to help you tally up your potential savings. (Note: We’re not affiliated with, nor endorse, HSA Bank. We’re just providing the link as a convenience.)

It gets better. Your HSA is also portable. Meaning that if you have an HSA through your employer, it follows you if you change jobs. The only requirement is that your health plan must have a high deductible. In 2022, that’s $1,400 for individuals, and $2,800 for a family.

So how much tax-saving money can you add to your HSA? For 2022, the maximum individual contribution is $3,650; for families, it’s $7,300. (At ages 55 and up, you get another $1,000 for “catch-up contributions.”)

You do, however, have to play by the HSA rules. For example, if you withdraw money from your HSA for non-medical expenses, there’s a 20-percent penalty, plus you have to pay ordinary income tax on that withdrawal.

Those rules change once you turn 65. At that point, if you still have funds in your HSA, it becomes just like an IRA: You can withdraw money for whatever needs you have. You will have to pay ordinary income tax on the withdrawal if it’s not earmarked for qualified medical expenses, but the 20-percent penalty will be waived. Also, you’re not allowed to keep contributing to your HSA once you’re enrolled in Medicare. You also can’t contribute to it if you’re claimed as a dependent on someone else’s tax return.

So HSA’s have a lot to offer—but also a lot of rules you must follow. Unsure if an HSA is right for you? Contact us today. We’ll be happy to help!

*Find the official qualifying medical and dental expenses in the IRS’s Publication 502, which you can download here.