In this article, we will discuss whether you should contribute to your HSA account or not. We will talk about the tax benefits available when contributing to your HSA and how it can be an important part of your retirement savings. We will also explain what an HSA account is, who is eligible to benefit from it, the allowed contribution limits, penalties for non-qualified withdrawals, how to invest your HSA funds, and the importance of not forgetting about the account, along with some simple calculations that illustrate the power of HSAs.
What is an HSA Account?
A Health Savings Account (HSA) is an account specifically designed to pay for healthcare costs. The tax benefits are significant enough that some financial planners recommend contributing to your HSA before contributing to an IRA. You can benefit from an HSA if you are self-employed, but most people obtain their accounts through their employers. Having a dedicated amount for healthcare expenses—which can also include long-term care later in life—frees up your other retirement savings.
Do You Qualify to Benefit from an HSA?
Not everyone is eligible to benefit from an HSA. The main rule is that you must be covered by a High Deductible Health Plan (HDHP). These plans require you to pay a large portion of your healthcare costs out-of-pocket before your insurance kicks in. The plan must require you to pay at least $1,500 ($3,000 for family plans) with a maximum limit of $7,500 ($15,000 for families) for the year 2023 to be eligible for an HSA.
Why Should You Contribute to Your HSA?
Some financial planners advise contributing to your HSA before making contributions to an IRA because the tax benefits are exceptional. You receive a tax deduction when you contribute money, and you can roll over your funds from one year to the next. You do not pay any taxes on the funds when withdrawn as long as you use them to pay for qualified healthcare expenses or, if you are 65 or older, to pay for qualified health insurance premiums. You only get one of those two options with an IRA. You receive tax benefits either when you contribute or when you withdraw, but not both. With an HSA, you enjoy tax benefits on both sides.
There Are Contribution Limits
You can contribute a maximum of $3,850 or $7,750 for families (the same limits that qualify for tax deductions) starting in 2023. Like other retirement accounts, these limits can be adjusted from year to year based on inflation rates. You can redirect contributions to an IRA or 401(k) or another retirement account once you reach the limit. Like other retirement accounts, you are allowed an additional contribution of $1,000 once you reach the age of 55.
Penalties for Non-Qualified Withdrawals
You must use your HSA funds for qualified medical expenses. You will pay ordinary income taxes on the withdrawal plus a 20% penalty if you use the funds for anything else and are under the age of 65. You could pay close to 50% or more in taxes and penalties if you do not use the funds for their intended purpose. However, you can use your HSA funds for things other than healthcare expenses after turning 65. In this case, you will only pay ordinary income tax on these withdrawals.
Understanding How to Invest Your HSA Funds
Do some research before using your HSA as an investment vehicle. First, ask the financial institution that will hold your HSA funds if your employer offers a high-deductible health plan with a health savings account. You won’t gain much benefit from contributing if it’s just a basic savings account since the money isn’t invested and doesn’t yield better returns. Many account institutions will allow you to invest the funds in something more investment-oriented than a traditional savings account. An HSA becomes a wealth-building tool if you have investment options in your account.
Do Not
Forget about it
The HSA is your account that you can take with you if you leave your current employer, just like a 401(k). You can contribute to your HSA as long as you are enrolled in a high-deductible health insurance plan. Don’t forget about your account. Gather all the information about it from your human resources department.
Some simple calculations illustrate the power of an HSA
Suppose the maximum contribution never increases, and you contribute the maximum for an individual each year ($3,850) for 20 years and achieve a 4% return. We will use a conservative rate of return because you will have some years when you will have to withdraw funds for medical expenses. With these numbers, you would have a balance of nearly $124,000 that is completely tax-free if used for qualified medical expenses. Your medical expenses will become a larger part of your monthly budget as you age. Having this amount set aside for expenses that may also include long-term care later in life frees up your other retirement funds for other spending. Your health savings account is not something you should zero out before the end of each year. It is a valuable tool in your retirement savings arsenal.
Frequently Asked Questions (FAQs)
Do HSA funds expire? No, HSA funds do not expire. The funds can be used at any time, as long as they are used for qualified medical expenses. How can I open a health savings account? Opening an HSA is similar to opening a retirement account. Your employer may help you open an account, your current bank may offer HSA accounts, or you can look for financial institutions that will provide an HSA. What can I spend the funds in my health savings account on? The rules for spending HSA funds generally depend on what qualifies for the deduction of medical expenses. These expenses include medical services from doctors, surgeons, transportation to doctor appointments, and costs for medications and medical equipment.
Source: https://www.thebalancemoney.com/max-out-your-hsa-contributions-4157954
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