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Healthcare in America is expensive. In fact, according to the most recent statistics available from the Centers for Disease Control and Prevention (CDC), Americans per capita spend approximately $10,739 on healthcare expenditures each year.
A health savings account (HSA) is a financial vehicle that helps you reduce your taxable income while saving money on a range of healthcare expenses. An HSA can work alone or in tandem with your health insurance. You can sign up for a health savings account via your employer or on your own, although plan offerings may vary.
What They Are, How They Work?
HSAs help Americans to manage High-Deductible Health Plans
HSAs can help Americans with High-Deductible Health Plans (HDHPs) save money to cover various out-of-pocket costs. For 2021, an HDHP has a minimum deductible of $1,400 for an individual and $2,800 for a family. These plans also have a maximum out-of-pocket cost (co-pays, deductibles, other qualified expenses) of $7,000 for self coverage and $14,000 for family coverage.
Funds in an HSA earn interest, and you can withdraw the funds when you need them for healthcare issues. Once your account is open, you can request a debit card (or, in some cases, checks) that you then use to pay for qualified medical expenses such as prescription drugs and prescribed medical tests.
Some items such as over-the-counter medicine do not fit the IRS definition of qualified medical expenses, so make sure you get clear, updated information on how you can use your money without penalty.
Employees and employers can contribute to HSAs, provided they follow specific rules. The IRS raised the annual contribution limit for individuals with self-only coverage to $3,5500 in 2021 and $7100 for a family. Like other tax-advantaged accounts, HSAs allow for "catch up" contributions. HSA account holders ages 55 and older can set aside an extra $1,000 per year.
HSAs offer a variety of tax benefits. You can deduct your contributions from your taxes. If your employer contributes money to your HSA, the IRS notes that the contribution may be excluded from your gross income. In other words, an employer's contribution of $1,000 does not add $1,000 to your gross income. The interest you earn from such an account is also tax-free. When you use your money for qualified medical expenses, the distributions are tax-free.
There are tax benefits to businesses too. An employer can deduct HSA contributions on its business income tax return. If you own a business or work in Human Resources, HSA contributions combined with an HDHP might well save your company on the cost of health insurance.
Take it With You
HSAs are portable. If you leave your job or retire, you take the HSA with you. You can rollover any unused funds year to year. That means if you have $500 in your HSA in December, you do not have to schedule any doctor's appointments to use up the money. Unused funds do not count towards the maximum contribution in the new year, so you can build a nest egg explicitly geared to address healthcare savings.
While you usually cannot use HSA funds to pay premiums, there are important exceptions. You can use HSA money to pay COBRA insurance if you lose your job and long-term care insurance too.
One caveat; Once you enroll in Medicare, you can no longer contribute to an HSA, but you can keep any leftover funds. These funds can pay for a Medicare supplemental policy or other costs not covered by Medicare. Your spouse inherits your HSA if you designate him or her as the beneficiary.
Consider a Health Savings Account
Few subjects in the United States are as complicated as healthcare and taxes. An HSA offers a relatively straightforward way of saving for medical costs while lowering your tax bill. If you are fortunate enough to have low medical expenses during your work years, an HSA allows you to build a nest egg to pay for the increased healthcare costs associated with old age.
If you or a family member has a costly medical condition now, you get a break on your taxes to deal with that problem.