Your Guide to Investing in HSAs
With open enrollment season in full swing, many of you may be reviewing different health insurance options. When reviewing their options, some people gloss over health savings accounts (HSAs) because they’re unsure of how to use and benefit from an HSA. However, HSAs can be powerful savings and tax-reduction vehicles, and if your employer offers an HSA, I encourage you to read more about their benefits and rules.
Tax Benefits
Saving in an HSA offers many tax benefits. Your contributions to an HSA are deductible, and employer contributions to your HSA are also excluded from your gross income. Moreover, your HSA can grow tax-free, and when you take distributions for qualified medical expenses, you do not have to pay taxes on distributions. HSAs can accordingly help you reduce your tax bill and pay for medical expenses. Even if you leave your current employer, you can retain your HSA and use the savings for medical expenses while working at a different job or while in retirement. Accordingly, HSAs can be very beneficial to retirees who are faced with healthcare expenses not covered by Medicare.
HSAs also function like an IRA once a taxpayer attains the age of 65. At that point, the account holder can take withdrawals from an HSA for any reason. If the withdrawals are not for qualified healthcare expenses, the withdrawals are taxed like IRA withdrawals but are not penalized. Withdrawals for qualified medical expenses are still tax-free.
HSA Contribution Limits
You can only contribute a certain amount to your HSA each year. In 2023, you can contribute up to $3,850 if you have an individual health plan, or you can contribute up to $7,750 if you have a family health plan. As is the case every year, those who are 55 or older can make an extra $1,000 catch-up contribution. Savers whose employers contribute to their HSA may have lower contribution limits. Your contribution limit will be reduced by the amount of employer contributions that are excludable from your income.
Minimum Deductibles
Not everyone is eligible to save in an HSA. Only employees with high-deductible health plans can use an HSA. In 2023, a high-deductible health plan is any individual plan with a deductible exceeding $1,500 and any family plan with a deductible exceeding $3,000.
Limits on Out-of-Pocket Expenses
HSA-eligible plans must also have a limit on out-of-pocket expenses that the insured is required to pay. Out-of-pocket expenses do not include premiums but do include deductibles, copayments, and other fees. Only in-network deductibles and fees will be used to calculate if the insured can open an HSA. In 2023, the out-of-pocket limit for individual plans is $7,500, and the out-of-pocket limit for family plans is $15,000.
