The IRS has created a plethora of tax-advantaged savings accounts over the last few decades. But the Health Savings Account (HSA) may just be the most tax-friendly savings vehicles ever written into the tax code. HSAs not only help you financially today, but can continue providing tax advantages for many years down the road.
The cost of health care is increasing faster than nearly any other expense for Americans. Being able to pay for medical services and products in a tax-preferred way can save you hundreds, if not thousands of dollars from now through retirement.
Health Savings Accounts provide the trifecta of tax advantages:
Everyone is almost guaranteed to have health care expenses at some point in their lives. It only makes sense to find the most cost-effective ways to pay them.
Because of the tremendous tax advantages of HSAs, the IRS puts caps on the amount of money you may contribute every year. For 2021, individuals may contribute up to $3,600 while families may deposit up to $7,200. For individuals 55 or older, an additional $1,000 “catch-up” contribution is allowed every year.
But there is a catch. During the years in which you wish to contribute to an HSA, you must be enrolled in a high-deductible health plan that is HSA Eligible (not every high deductible plan is automatically HSA Eligible). The IRS specifically defines how a plan qualifies as a high-deductible plan. For 2020, any plan with a deductible of at least $1,400 for individuals or $2,800 for a family. Further, a plan’s total out-of-pocket maximum cannot exceed $6,900 per individual or $13,800 for a family.
Health Savings Accounts are fantastic vehicles to save on medical expenses today or to save for future expenses you might have in retirement. Regardless of when you decide to spend your HSA dollars, it is important to keep all receipts for medical expenses on file. Receipts are required whenever you wish to make a distribution.
For those spending regularly, look for an HSA offering a checking account without maintenance fees and an accompanying debit card. Debit cards automatically track qualifying purchases when paying for medical services. They may also be used at pharmacies and retail stores but will require those receipts to back-up your purchases.
For those saving for future medical bills, considering an HSA with investment options. Since your account grows tax-deferred and distributions are tax-free, your investments are free from paying capital gains or income tax.
Whether you have a HSA Eligible plan through your employer or on an individual plan, you have the choice of which bank to use to set up your HSA Savings Account. HSA Bank specializes in HSA Savings Accounts and their site offers a ton of up to date information. Check them out at their HSABank Website.