Considering a High Deductible Health Plan? Learn the benefits of a Health Savings Account that can be paired with an HDHP.
Are you shopping for a new health insurance plan? With lots of options to choose from, you’ll want to know the pros and cons to each. When considering a High Deductible Health Plan (HDHP), it’s important to know it can be paired with a Health Savings Account (HSA). Continue reading to learn what benefits come with an HSA.
What Is A Health Savings Account
An HSA is used to help cover medical expenses and lower your taxable income. If you have a qualifying HDHP, you’re eligible to contribute to an HSA which can be offered by an employer or opened through a financial institution. Funds saved are available to pay for qualified medical costs.
Range Of Qualifying Expenses
One advantage of an HSA is the variety of eligible expenses it covers, including medical, dental, and mental health services. Other benefits of coverage include prescriptions, copays, and deductible expenses that can be used for you, your spouse, or eligible dependents.
As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in 2020, over-the-counter medicine without a prescription and menstrual products are now qualified as HSA expenses. Be sure to check with your employer’s HSA administrator if you have any questions about what is covered.
Triple Tax Advantage
Typically, contributions to your HSA are pre-tax dollars deducted through payroll from your employer. That means these contributions aren’t included in your gross income and aren’t subject to federal income taxes. In most states, contributions aren’t subject to state income tax.
Another tax advantage is tax-free growth. Even though most HSAs earn a minimal amount of dividends, any earnings on the account are tax-free. Plus, any unused money in the HSA rolls over each year unlike a Flexible Savings Account (FSA). Your balance is available for future qualified expenses even if you change your health care plan, employers, or decide to retire.
Withdrawals from your account are also tax-free if made for qualified medical expenses. At age 65, funds can be used for nonqualified medical expenses. Withdrawals are penalty-free but subject to ordinary income tax. However, HSA funds can also be invested to boost your returns and save for retirement medical expenses.* Talk with a financial planning professional before investing to see what is recommended.
HSA contributions can be made by you, your employer, or a third party, like relatives on your behalf. Even though funds are able to roll over each month, the IRS does set limits on how much you’re able to contribute each year.
Most HSAs provide a debit card or checks to use to pay for medical expenses. You have the option to use your HSA debit card to pay for prescription medication or other eligible expenses on the spot, wait for your bill in the mail and call the billing center to pay over the phone, or use it to reimburse yourself for using a different form of payment.
If you qualify for an HSA, especially at an early age, it can contribute to a secure financial future. The HDHP needed for an HSA might not benefit everyone though, so be sure to compare with a traditional health plan to see what is best for you.
*Investing should be used as a long-term wealth-building strategy and carries the risk of loss.
This article is for educational purposes and should not be construed as tax or investment advice. Talk with an investing professional or tax professional for guidance.