A health savings account (HSA) is a type of savings vehicle that enables you to set aside pre-tax money for qualifying healthcare expenses. The term "pre-tax" means that you don't have to pay taxes on the contributions to your HSA.
Your contributions grow tax-free and you don't have to pay taxes on the withdrawals as long as they're used for eligible expenses. Keep reading for everything you need to know about using an HSA.
HSAs are Used in Conjunction with a Certain Type of Health Insurance
To open an HSA, you must have a certain type of health insurance known as a high deductible health plan (HDHP). An HDHP is a plan with a deductible of at least $1,350 for an individual and $2,700 for a family (as of the 2019 tax year).
Many employers offer HSAs along with their HDHPs to help employees defray their medical expenses. You can also purchase HDHP plans that permit an HSA on the federal health insurance marketplace. Note that you can't use the funds in your HSA to pay your insurance premiums.
Employees and Employers May Contribute to an HSA
One of the top advantages of an HSA is that employers may make contributions to an HSA on behalf of the employee. For example, your employer might make a contribution of $1,000 each year to assist you with covering your deductible.
As of 2020, you may contribute $3,550 on an annual basis if you have an individual health plan. If you have a family health insurance plan, this cap rises to $7,100. If you're 55 or older, you can contribute an extra $1,000 each year. These limits apply to all contributions to your HSA, whether they're from you or your employer.
Many employers give their employees the ability to contribute to their HSAs via payroll deduction. However, you can also make contributions to your plan outside of your normal paychecks. If you opt for this contribution method, make sure to keep track of your contributions so you can deduct them on your taxes.
Your HSA Funds Roll Over From Year to Year
Another great benefit of an HSA is that your contributions (and earnings) roll over each year. This means that you can use an HSA to save for future healthcare expenses, including medical expenses that you might incur once you retire.
Many HSA plans offer investment options once your balance reaches a certain amount so that you can earn potentially higher returns on your money. Reach out to a financial planning service to learn more.