The Unique Advantages of Health Savings Accounts
You’ve probably heard the term “Health Savings Account” or “HSA” before. What is it? Why is it valuable? In today’s video, we’ll discuss the unique advantages it can have for you and your family
Health savings accounts, or HSA’s have some of the best tax advantages, but remain underutilized and misunderstood in our opinion – and I’ll tell you how you can utilize these accounts to save for both current and retirement healthcare expenses, all while reducing your taxes.
1. What is a Health Savings Account?
An HSA allows you to contribute pre-tax funds and make tax-free withdrawals to pay for qualified medical expenses like prescriptions, co-pays, or dental care. It can be a great fit for those who have qualifying health care plans. Check with your employer if your Health Care Plan is considered an “Health Care Savings(HSA)” eligible plan. Some 45% of employers offer HSA’s to their employees1.
1 Source: Met Life’s 21st Annual U.S. Employee Benefit Trends Study(2023).
2. What’s the big deal?
These accounts come with unique tax benefits. Traditional retirement plans such as IRA’s and 401k’s are generally pre-tax, that is they reduce your taxable income when you contribute, grow tax deferred, and then you pay tax on your withdrawals in the future. On the other hand, ROTH retirement plans such as ROTH IRA’s or ROTH 401k’s do not receive the tax deduction on contributions, but grow tax free and are tax free upon qualified withdrawals. Health Savings Accounts(HSA) offer the best of both of these – tax deductions for the contributions like a Traditional retirement plan and tax free growth and tax free withdrawals for qualified expenses like a ROTH retirement plan. And that’s a very big deal.
3. Use it or lose it?
No. Unlike Flexible Savings Accounts(FSA’s) which are use it or lose it plans, Health Savings Account funds never expire and carry over from year to year. I know they sound similar, but that one word makes a HUGE difference. This is a unique advantage of HSAs that sets them apart from flexible spending accounts (FSAs), which require you to use the funds in the account by the end of the year or lose them. HSA’s are portable, so you can keep the funds if you leave your job. If you are no longer enrolled in a qualifying plan you can still keep your existing HSA account and funds, you just can’t contribute any longer.
4. Contribution Limits, Savings tip
The 2024 contribution limit for HSA’s is $4150 for individuals, $8300 for family coverage.
TIP: If your employer offers matching retirement plan contributions we always recommend you contribute at least the minimum to receive this matching contribution. Then focus on maxing out your HSA, if eligible, to take advantage of these unique tax and savings benefits. Once the HSA is maxed out, if you have the ability, make additional retirement plan contributions.
Retirement Benefits
HSAs may not seem like a retirement tool at first glance, but they can be beneficial as you get older. Medicare recipients cannot contribute to an HSA, but they can still use one to pay for medical expenses, such as Medicare premiums. Because funds do not expire, you can start saving early in an HSA to cover medical bills in retirement.
Summary
You have questions, we have answers. Give us a call and we can help you understand how the unique advantages of a Health Savings Accounts can work for you.