Health Savings Accounts (HSA) are great ways save tax-free money from medical expenses both in current term, and for retirement years. By making wise choices, you an maximize, the benefit of fantastic savings accounts. Take quick look basics and the explore some tips on make your HSA money grow.
What is an HSA?
According to the website HealthCare.gov, a Health Savings Account is an type of savings account that your set aside money on pre-tax basis than pay for qualified medical expenses. By the untaxed dollars in HSA pay of deductibles, copayments, coinsurance, and some other expenses, though may able lower you overall health care costs. HSA funds generally may not used pay premiums.
In order to contribute the HSA, you must enrolled in High Deductible Health Plan (HDHP). A HDHP is defined plan with higher deductible than traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself before that insurance company starts the pay share (your deductible). A high deductible plan (HDHP) can combined with health savings account (HSA), allowing you to pay for certain medical expenses with money free from federal taxes.
HSA vs Traditional Insurance
As mentioned, you are able to open a Health Savings Account when you enroll in your employer’s High Deductible Health Plan. A HDHP is different from traditional insurance in that with traditional insurance, you and your employer both contribute to the cost of your health insurance each month—otherwise known as the premium. You then have a fixed cost—a “co-pay”—that you pay when you visit a doctor, pay for prescriptions, or have a health procedure. With a HDHP, the patient is incentivized to shop around for lower cost doctor visits and procedures since are paying for costs out their pocket at full amount from beginning until the high deductible amount is met.
Now, when used in tandem, the two components of the HDHP and the HSA have the potential to save the insured party money on their health care expenses. Here’s how it works:
- Contribution Limits
Each year, the government puts a cap on amount of money that individual and a family can contribute to HSA. For 2020, individual can contribute up to $3550 and a family can add in $7100 to their account. In 2021, the amounts both increase: individuals will $3600 and families will able to deposit $7200.
- Triple Tax Benefits
When you contribute to your HSA, your money gets a triple tax benefit. There is a 0% tax on deposited money, your money grows tax-free while in the account, and, when used for qualified medical expenses, you can withdraw the money tax-free.
- Roll-over
The money that you deposit into your HSA is yours to keep–forever. If you change jobs, the money follows you. If you don’t use the money you’ve contributed by the end of the year, it rolls over to the next year with no penalty.
Tips to Maximize the Benefits of Your HSA This Year
Don’t be complacent to let your tax-free hard-earned money simply sit in your HSA all year! You can by making some wise choices. Here’s some tips on how to do this:
- Do you get a bonus at the end of the year? You can use that bonus money to bulk up your HSA until April 15 of the following calendar year. Just make sure you don’t contribute more than the annual allowed amount or you will pay a 6% tax on the overage.
- Once you hit the minimum contribution amount for your particular plan, you can invest a portion of the contributions in an IRA account and watch your tax-free dollars grow even more! Check with your plan manager regarding the minimum amount required.
- There is a once-in-a-lifetime allowance for you to move money over from a traditional or Roth IRA to your HSA. This allows you to kickstart that HSA so that you can begin using that money for expenses right away. The annual contribution limit still applies to scenario for individual and family amount.
- Long term care insurance is expensive and you can use your HSA money to help pay for those insurance premiums. Again, check with your plan manager to make sure you are staying within the allowed range for using this money for those premiums.
- Finally, name your spouse as the beneficiary of your account. When you pass away, your spouse will have access to these funds with the same tax benefits as you did. In fact, your HSA money can even continue to grow tax-free after you pass.
Finding ways to save money is always a good idea. Finding ways to maximize the benefit of your already saved money is even better!