Health Savings Accounts (HSAs) have become increasingly popular in workplace benefit plans in recent years. At the core, an HSA allows you to put money away in an account tax free to use for medical expenses, included prescriptions, office visits and procedures. But an HSA is a lot more than just a medical expense account.
In 2019, an individual with a qualified high deductible health plan can deposit $3,500 into their HSA; an individual with family coverage can deposit up to $7,000. In 2020, however, these amounts will increase slightly to $3,550 individual/$7,100 family, according to the IRS. With the new caps, there’s no better time to contribute to your HSA. Here’s what we mean:
- Payroll deductions mean contributions are usually pre-tax. If the funds are pre-tax, they’re not included in your gross income and are exempt from federal income taxes; even still, the contributions in some states aren’t subject to state taxes either. If you make contributions with after-tax dollars, you can deduct them on your income taxes.
- Withdrawals for qualified expenses are tax-free. When you take contributions out for qualified medical expenses, that money isn’t subject to federal (or state, in some cases) taxes. Any earnings or interest in the account also grows tax-free.
- You get to keep the money year after year, and even if you switch employers or plans. The funds in your HSA are yours to keep, whether you quit your job, move to a different healthcare benefit plan or if you don’t use it that year.
There are a few drawbacks to HSAs, however. Most HSAs are part of a high-deductible health plan, which can result in higher out-of-pocket costs to the patient for care. You’re also subject to taxes and penalties if you use the funds for nonmedical expenses before age 65.
An HSA can be an attractive option for many people. It’s best to talk through the advantages and disadvantages with your financial advisor to see if an HSA is the right call for your situation.