Table of Contents
Key Takeaways
- HSAs allow you to set aside pretax income to pay for qualified medical expenses. This can help reduce your overall health care costs.
- To contribute to an HSA, you must have a high-deductible health plan (HDHP). For 2024, the minimum deductible for an HDHP is $1,600 for an individual and $3,200 for a family.
- There are annual contribution limits for HSAs. For 2024, the max is $4,150 for an individual and $8,300 for a family.
- HSA funds roll over each year and you own the account. It moves with you even if you change employers or health plans.
- HSA withdrawals for non-medical expenses are subject to taxes and penalties, except after age 65. For qualifying medical expenses, withdrawals are tax-free.
A health savings account (HSA) helps you set money aside for health-related expenses. You might have heard the term before or read about it in your benefits package, but were unsure about what an HSA is and how it works.
Having a better understanding of HSAs may help you decide if it's a viable option for you and your needs.
How Can You Use an HSA?
You can use an HSA to set aside pretax income in order to pay for qualified health care expenses such as prescription drugs, copays, ambulance rides, and dental and vision care. Typically, you cannot use your HSA to pay for your health care premiums. Some banks, financial institutions and health insurance companies offer HSAs.
If one is offered through your health insurance company, you must have a high-deductible health plan (HDHP) to qualify. With an HDHP, you typically pay a higher deductible out-of-pocket before your health insurance plan kicks in. Although the premiums for an HDHP tend to be lower than average, the costs you have to pay before reaching the deductible can add up. Every year the Internal Revenue Service (IRS) establishes minimum deductibles for HDHPs.1 For 2024, the HDHP minimum deductibles to qualify for an HSA are $3,200 for a family and $1,600 for an individual.
How Does an HSA Work?
Before you open an HSA, it's important to understand how they work. Many health care providers offer HSAs. If yours doesn't have that option, you may be able to open your own account. If you qualify and decide to contribute to an HSA, there are maximum yearly limits. In 2024, the maximum contribution for a family is $8,300, and for an individual is $4,150.
You might be offered an HSA through your employer. If so, check to see if you can contribute through automatic payroll deductions. Some employers will also offer contribution plans in a benefits package. Something else to keep in mind is that your HSA moves with you. It's not limited to an insurance plan or employer, and you can even continue to contribute to your account if you're retired and under 65.
When it comes time to put your HSA savings to use, most plans will give you a debit card that's linked to your account to pay for your qualifying medical expenses.
HSA Advantages, Tax Benefits & Withdrawals
There are a few other key things to keep in mind as you explore your HSA options. For many, an advantage of an HSA is that the contributions you make roll over each year, even if you don't use them. Once you hit age 65 and enroll in Medicare, however, you can't continue to contribute to your HSA. You can still use the funds in it to help cover qualifying out-of-pocket medical expenses, including assisted living costs. HSAs also have some tax benefits. Contributions to HSA are pretax and withdrawals for qualifying medical expenses are tax-free.
When it comes to withdrawals, there's one essential rule to keep in mind: If you withdraw money from your HSA to pay for nonqualifying expenses, you will owe taxes and a 20% penalty if you're under the age of 65, according to the IRS. If you're over 65, then you will have to pay taxes on the money you withdraw.
An HSA may be a helpful tool for you. HSAs can be part of a long-term strategy to help you prepare for the costs of medical expenses and help to avoid financial strain if unexpected health issues arise.
Sources
- Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans. https://www.irs.gov/publications/p969.
