Top 5 Reasons to Consider an HSA
Looking to save on medical coverage? Check out the tax and other benefits of health savings accounts.
Health savings accounts (HSAs) have become a popular way to set aside money to pay for medical expenses while reaping attractive tax benefits. In 2019, 30% of U.S. workers with health coverage were enrolled in a high-deductible health plan (HDHP) with a savings option such as an HSA, up from 20% in 2014, according to the Kaiser Family Foundation.
An HSA — offered through your employer or another provider — allows you to set aside money tax-free, then use it to pay for qualified healthcare expenses. If you’re enrolled in an HDHP, an HSA can be a smart way to save for both current medical bills and the healthcare costs you’ll face in retirement.
Here are five key reasons to consider opening an HSA:
HSAs offer triple tax savings. First, contributions to your HSA reduce your taxable income, either through a deduction on your tax return or through pretax withdrawals from your paycheck. In addition, any savings growth is income tax free. And finally, you can take out money at any time to pay for qualified medical expenses tax-free. (Once you’ve turned 65, you can draw from your HSA for non-medical expenses, although such withdrawals will be taxed.)1
You can use an HSA to pay for a wide range of medical costs. You can withdraw HSA funds tax-free to pay for out-of-pocket expenses you incur until you hit your deductible. And the types of expenses that qualify may surprise you. For instance, you can use your HSA to pay for contact lenses and contact lense solution, pregnancy test kits, and chiropractic treatments as well as doctor visits, dental care and drug prescriptions.
No “use-it-or-lose-it” provision. You may be familiar with flexible spending accounts (FSAs), another type of healthcare savings account. With an FSA, you generally forfeit any money that’s left in the account at year’s end. That’s not the case with HSAs, which allow your unspent balances to roll over indefinitely.
Save and invest for healthcare in retirement. Speaking of that indefinite rollover: You can use your HSA funds to pay for medical care in retirement, too. In fact, many HSAs allow consumers to invest their HSA assets in mutual funds. That means they’re exposed to tax-free potential growth based on the performance of those investments. Over time, your HSA savings could become an important tool for covering your healthcare expenses in retirement.
With an HSA, you can take it with you. If you change jobs or retire, you lose access to any FSAs or employer-funded health reimbursement arrangements (HRAs). By contrast, you own your HSA — and as long as you continue to be enrolled in an HDHP, you can keep saving and investing in your HSA. Even if your health insurance changes, you can continue to make tax-free withdrawals for qualified medical expenses from your account — now and in retirement.
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1 Contributions, any earnings and withdrawals are federal income tax-free if used to pay for qualified medical expenses. State income taxes may still apply. HSA funds used for nonqualified medical expenses may be subject to applicable federal and state income taxes and/or penalties.