A Guide To Saving Money On Healthcare Expenses
A Health Savings Account (HSA) is a type of savings account that allows individuals to set aside money on a pre-tax basis to pay for qualified medical expenses. The IRS sets guidelines for HSAs under Section 223 of the Internal Revenue Code.
A primary benefit of an HSA is that it allows individuals to save money on healthcare expenses by contributing pre-tax dollars into the account. The funds in an HSA can be used to pay for qualified medical expenses, tax-free. Qualified medical expenses are defined by the IRS under Section 213(d) of the Internal Revenue Code.
There are a variety of qualified medical expenses that can be paid for using funds from an HSA. These include deductibles, copayments, and coinsurance for medical care, as well as expenses for prescription medications, medical equipment, and services such as acupuncture and chiropractic care.
Other Qualifying Products & Services That Can Be Paid For Using HSA Funds
HSA funds can be used to pay for a variety of dental and vision expenses, including routine cleaning, exams, and procedures, as well as glasses and contact lenses.
In 2020, the CARES Act expanded the definition of qualified medical expenses to include OTC medications. This means that individuals can now use HSA funds to purchase OTC medications without a prescription.
HSA funds can be used to pay for mental health services, including therapy sessions and psychiatric care.
HSA funds can be used to pay for long-term care expenses, including nursing home care, home health aides, and assisted living facilities.
In some cases, HSA funds can be used to pay for health insurance premiums. However, there are certain restrictions, and individuals should consult with their tax advisor to determine whether their health insurance premiums qualify.
To be eligible for an HSA, an individual must be covered by a high-deductible health plan (HDHP). In 2023, the minimum deductible for an HDHP is $1,400 for individuals and $2,800 for families, with a maximum out-of-pocket limit of $7,050 for individuals and $14,100 for families. Contributions to an HSA are tax-deductible, up to a certain amount; meaning $3,650 (individuals) and $7,300 (families) can be contributed in 2023. Individuals who are 55 years or older can contribute an additional $1,000 per year.
HSA owners can invest the money from the HSA and any gains are also tax-free. Any unused HSA funds roll over from year to year, so they can accumulate over time. This can be especially beneficial for individuals who are young and healthy and may not need to use their HSA funds immediately.
Withdrawals from an HSA for qualified medical expenses are tax-free; meaning individuals can use their HSA funds to pay for healthcare expenses without having to pay taxes on the money they withdraw.
Funds withdrawn from an HSA for non-medical expenses are subject to income tax, within that specific year, and a 20% penalty. After the age of 65, individuals can withdraw funds from an HSA, for any reason without penalty, but will still have to pay income tax on the withdrawn amount, if it is not used for qualified medical expenses.
Another major benefit of having an HSA is the tax-advantaged savings that can help individuals reduce their taxable income, meaning one is able to stretch their income further, while also saving money on healthcare expenses. Unlike an FSA, an HSA is a private account owned and operated by an individual, so there is no risk of losing access to the accumulated funds due to a change in employment or even retirement. An HSA is a valuable tool to prepare for unexpected medical expenses, save money, and plan for the future.
As with any financial decision, individuals should consult with a financial advisor or tax professional before opening a Health Savings Account to determine whether it is the right choice for their specific financial situation.