How to Use an HSA, a Health Savings Account

by | Sep 12, 2022 | Blog

If you want an efficient way to save for future medical bills, look no further than an HSA, a health savings account.

We always talk about our buckets approach. The idea is you mentally (or physically) separate your money into buckets, depending on what they will be used for. Most folks will have a checking/spending bucket, an emergency bucket and a long-term (investments) bucket.

If you want to blend two of those buckets together, an HSA, or health savings account might be a good option for you.  That’s because an HSA, a health savings account, allows you to save for medical emergencies (out-of-pocket expenses) in a tax-deferred account and invest that money, if you choose.

In a recent podcast, we talked about how retirees underestimate health care expenses in retirement. And a health “spending shock” is actually a bigger risk than market uncertainty. Folks can mediate that risk by saving into an HSA and setting up funds specifically in case that happens.

The key benefit of an HSA is that it allows people to put away a portion of their paycheck without being taxed. Many people consider it to be one of the most efficient ways to save, regardless of whether a person is saving for a catastrophe or their long-term future. It can be helpful to learn more about how an HSA can be commonly used to see if this option is right for you.

Income and Deductibles 

Typically, those who opt for an HSA have a high deductible that they likely wouldn’t be able to pay if they didn’t make provisions over time to do so. For example, if a person makes $30,000 a year after taxes and they have a $6,000 deductible, then they would be giving up a full 20 percent of their income if they have major medical expenses.

An HSA is sometimes offered by health insurance companies, so an individual can sign up for the account simultaneously to signing up for their health insurance plan. The government is incentivizing policyholders to prepare for emergencies, so there are fewer delinquent policies. If your insurance policy doesn’t offer an HSA option, it’s possible to open a separate account at practically any financial institution.

Reducing Your Taxable Income 

Having money taken out of your income tax-free is a way to reduce the amount of taxable income you make a year. It helps you maximize your income while simultaneously safeguarding against emergency health situations.

Individuals who contribute $2,000 to their HSA a year will be taxed as though they make $2,000 less than their standard income. The money you contribute to your HSA will roll over from year to year, which means the insured can grow their emergency funds over time. While these funds typically can’t be used to pay for insurance premiums, they can be used to pay for co-pays, deductibles, and other eligible non-covered expenses. 

Maximum Restrictions 

The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. For individuals, the maximum for 2022 is $3,650 and $7,300 for a family. 

Adults over the age of 55 are allowed to contribute an extra $1,000 in catch-up contributions. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and family are allowed to contribute to an HSA on behalf of the individual. The contribution limits for employers generally change every year as well. 

How to Use an HSA, a Health Savings Account

Some people use their health savings account as a savings account while others may choose to invest the money in the market. And if you don’t use the money in a given year it continues to compound.

When it comes to an IRA, individuals are required to withdraw from the account once they reach the age of 72, but an HSA allows people to continue contributing to it tax-free with no such requirement.

The income deposited is also not subject to the FICA tax that goes toward social security and Medicare, while an IRA would be subject to the additional tax. HSAs are also allowed to be used for non-eligible expenses, though they will be taxed as income if the individual chooses to do so. 

A health savings account can be helpful for anyone who hopes to be able to pay their health insurance expenses immediately. They may be more commonly chosen by those with high deductibles, but the truth is that practically anyone can benefit from the tax-free incentives if they so choose. 

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