Understanding This Advantageous Savings and Investment Tool
Nearly one in five Americans who are in their 30s has a Health Savings Account HSA. As Health Savings Accounts have now fully entered the mainstream, so have questions on what exactly they are and how to maximize them. In this article, we will review the basics of HSAs and how they can fit into an effective financial plan.
What is a Health Savings Account?
An HSA is an account that allows you to save for medical expenses. The beauty of an HSA is that it has a triple tax benefit when used for qualified medical expenses. Here’s how it works:
- Money that you put into an HSA is tax deductible, meaning you receive an above-the-line tax deduction for contributions.
- Cash in an HSA can be invested and grown tax-free.
- When you need to use it, whether it’s in three months or three decades, all distributions from a Health Savings Account are tax-free provided they are for qualified medical expenses.
So what exactly are these qualified medical expenses that you can use the HSA for? The list is quite extensive. For example, doctor visits, prescription costs, therapy, and surgery are generally included. However, something like elective cosmetic surgery would not be included. If you use your HSA for a non-qualified expense, you will need to pay ordinary income tax on the distribution AND generally a 20% penalty.
How Can I Get an HSA?
In order to be eligible for an HSA, you will need to have a High Deductible Health Care Plan HDHP. Once you have one, typically through your employer, a Health Savings Account will likely come with it. Once you are enrolled in the High Deductible Health plan, you can often elect to deduct a certain percentage or amount of your salary into the HSA that comes with the plan. If you have a High Deductible Health Care Plan and your employer does not offer an HSA, certain financial institutions will allow you to open a Health Savings Account on your own. If you have to take this route and you contribute to it, make sure you report your contributions come tax time.
How Much Can I Put In?
As of 2022, you can put up to $3,650 in an HSA if you are the only person covered on your health insurance plan. If you have a plan with family coverage, you can contribute up to $7,300. If the HSA account holder is over 55, an additional $1,000 can be contributed in the form of a catch-up contribution.
Should I Use an HSA?
We generally recommend that if you have access to an HSA, you take advantage of it and max it out. Once you have the Health Savings Account, you will likely have a menu of investment choices like your 401k. The combination of funds that you pick will all be based on your financial objectives and what is available to you.
MDRN Wealth has the ability to directly manage your HSA if needed. If you are looking for further help on Health Savings Accounts or you need additional guidance regarding your employee benefits and how to maximize them in accordance with your financial plan, please reach out.
MDRN Wealth LLC does not provide specific legal or tax advice. Please consult with professionals in these areas for specific legal and tax recommendations. The information provided herein is general information. It is not intended to be construed as investment, tax, or legal advice. Information in this article is not an offer or solicitation to purchase, sell, or endorse a specific company, security, investment vehicle, or strategy. Investing involves risk and the possible chance for loss of principal. Please consider your tolerance for risk before investing. Past performance is never guaranteed and future results can vary. Opinions conveyed by MDRN Wealth LLC cannot be viewed as an indicator of future performance and are subject to change. Results may vary. Use information at your own risk.