What Is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged account created for or by individuals covered under high-deductible health plans ༺(HDHPs) to save for qualified medical expenses. Contributions are made into the account by the individual or their employer and are limited to a maximum amount each year.

The contributions to an HSA are invested over time and can be used to pay for qualified medical expenses, such as medical, dental, and vision care and prescription drugs.

How an HSA Works

Individuals who have an HDHP may qualify to open a Health Savings Account (HSA), and the two are usually paired together. To qualify for an HSA , you must meet these eligibility standards established by the Internal Revenue Service (IRS):

• Have a qualified HDHP
• Have no other health coverage
• Not be enrolled in Medicare
• Not be claimed as a dependent on someone else’s tax return

The maximum contribution for an HSA in 2024 is $4,150 for an individual (rising to $4,300 for 2025) and $8,300 for a family ($8,550 in 2025). The annual limits on contributions apply to the total amounts contributed by both the employer and the employee. Individuals age 55 or older by the end of the tax year can make 澳洲幸运5官方开奖结果体彩网:catch-up contributions of an additional $1,000 to their HSAs.

An HSA can also be opened at certain financial institutions. Contributions can 澳洲幸运5官方开奖结果体彩网:only be made in cash, while employer-sponsored plans can be funded by the employee and their employer. Any other person, such as a family member, can also contribute to the HSA of an eligible individual. 澳洲幸运5官方开奖结果体彩网:Self-employed or unemployed individuals may also contribute to an HSA, provided that they meet the eligibility requirements.

Individuals who enroll in Medicare can no longer contribute to an HSA as of the first month of enrollment. However, they can receive tax-free distri🅘butions for qualified medical expenses.

HSA Special Considerations

HDHPs have higher annual 澳洲幸运5官方开奖结果体彩网:deductibles, which means the plan pays nothing until you reach these amounts in out-of-pocket expenses. However, it also has lower premiums than other health plans. The financial benefit of an HDHP’s low-premium and high-deductible sꦫtructure depends on your personal situation.

The minimum deductible required to open an HSA is $1,600 for an individual or $3,200 for a family for the 2024 tax year ($1,650 and $3,300, respectively, for 2025). The plan must also have an annual 澳洲幸运5官方开奖结果体彩网:out-of-pocket maximum of $8,050 for self-coverage for the 2024 tax year ($8,300 for 2025) and $16,100 for families for the 2024 tax year ($16,600 for 2025).

When you pay qualified medical expenses equal to a plan’s deductible amount, ad🥃ditional qualified expenses are divided between you and the plan.

Example of HDHP

For example, the insurer may cover a percentage of the qualified expenses per the contract (usually 80% to 90%), while you may pay the remaining 10% to 20% or a specified co-pay.

So,ꦚ if you had an annual deductible of $1,600 and a medical claim of $3,500, you 𒅌would pay the first $1,600 to cover the deductible for the year. You would then pay 10% to 20% of the remaining $1,900, and the insurance company would cover the rest.

Once the annual deductible is met in a given plan year, the plan typically covers any additional medical expenses, except for costs not covered under the contract (such as co-pays). The insured can withdraw money accumulated in an HSA to cover these out-of-pocket expenses.

Advantages and Disadvantages of an HSA

HSAs have advantages and drawbacks. The effect of the𓆉se accounts depen🍷ds on your personal and financial situations.

Pros Explained

Contribution tax advantages: Employer and individual contributions by 澳洲幸运5官方开奖结果体彩网:payroll deduction to an HSA are excluded from the employee’s taxable income. An individual’s direct contributions to an HSA are 100% 澳洲幸运5官方开奖结果体彩网:tax deductible from the employee’s income. Earnings in the account are also tax-free. However, excess contributions to an HSA incur a 6% tax and are not tax deductible.

Distribution tax advantages: Distributions from an HSA are tax-free, provided that the funds are used for qualified medical expenses as outlined by the IRS. Distributions used for medical expenses covered under the HDHP plan are included in determining if the HDHP’s deductible has been met.

Investment options: You can also invest the 澳洲幸运5官方开奖结果体彩网:money in your HSA in stocks and other securities, potentially allowing for higher returns over time.

Cons Explained

Deductible requirements: The most obvious key drawback is th✨at you need to be a good candidate for an HDHP. In addition, you must have a high-deductible plan, lower insurance premiums, or be able enough to afford the high deductibles and benefit from the tax advan𒀰tages.

Requires extra cash: Individuals who fund their own HSAs, whetꦛher through payroll deductions or directly, should be finan😼cially capable of setting aside an amount that would cover a substantial portion of their HDHPs’ deductibles. Individuals without enough spare cash to set aside in an HSA may find the high deductible amount burdensome.

Filing requirements: HSAs also come with regulatory filing requirements regarding contributions, specific rules on withdrawals, distribution reporting, and other factors. This creates a record-keeping burden that may be difficult to maintain.

Withdrawals Permitted Under an HSA

Amounts withdrawn from an HSA aren’t taxed as long as they are used to pay for services that the IRS treats as qualified medical expenses. The plan's manager will issue an 澳洲幸运5官方开奖结果体彩网:IRS Form 1099-SA for distributions from the HSA. Here are some basics you need to know:

• Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan.
• 澳洲幸运5官方开奖结果体彩网:Insurance premiums don’t count as a qualified medical expense unless the premiums are for Medicare or other healthcare coverage (provided you are age 65 or older); for health insurance when receiving 澳洲幸运5官方开奖结果�ജ�体彩网:healthcare continuation coverage (COBRA); for coverage when receiving unemployment compensation; or for 澳洲幸运5官方开奖结果体彩网:long-term care insurance, subject to annually adjusted limits. Premiums for Medicare supplemental or Medigap policies are not treated as qualified medical expenses.

If distributions are made from an HSA to pay for anything other than a qualified medical expense, that amount is subject to both income tax and an additional 20% tax penalty. However, once an individual turns 65, the 20% tax penalty is eliminated and only income tax applies for non-qualified withdrawals.

HSA Contribution Rules

Contributions made to an HSA do not have to be used or withdrawn during the tax year. Instead, they are vested, and any unused contributions can be rolled over to the following year. Also, an HSA is portable, meaning that if employees change jobs, they can still keep their HSAs.

However, if the designated beneficiary is not the account holder’s spouse, then the account is no longer treated as an HSA. The beneficiary is then taxed on the account’s 澳洲幸运5官方开奖结果体彩网:fair market value, adjusted for any qualified medical expenses of the decedent paid from the account within a year of the date of death.

HSA vs. Flexible Spending Account

The HSA is often compared with the 澳洲幸运5官方开奖结果体彩网:Flexible Spending Account (FSA). While both accounts can be used for medical expenses, 澳洲幸运5官方开奖结果体彩网:some key differences exist between them:

• FSAs are employer-sponsored plans and are not portable if you change jobs.
• Only employed individuals can sign up for FSAs.
• Unused funds in the FSA during a given tax year can’t be rolled over and are forfeited once the year ends.
• Your elected contribution amount for an FSA is fixed, while HSA contributions can be flexible.

The maximum contribution for an FSA for the 2024 tax year is $3,200.

The Bottom Line

HSAs are one of the best tax-advantaged 澳洲幸运5官方开奖结果体彩网:savings and investment tools available under𒀰 the U.S. tax code. They are often referred to as triple tax-advantaged because:

• Contributions are not subject to tax.
• The money can be invested and grown tax free.
• Withdrawals are not taxed as long as you use them for qualified medical expenses.

As a person ages, medical expenses tend to increase, particularly when reaching retirement age and beyond. Therefore, 澳洲幸运5官方开奖结果体彩网:sta✤rting an HSA early if you qualify—and allowing it to accumulate over a long period—can benefit yo♏ur financial future.