Health savings accounts (HSAs) have been around for nearly two decades, but many people are unfamiliar with them and the benefits they offer. This article is an overview of how they work, who is eligible for them, and what tax advantages they provide.

An HSA is essentially an interest-bearing, medical savings account that you can use to pay or reimburse certain medical expenses that you incur. Such qualified medical expenses may include (but are not limited to): diagnosis, cure, mitigation, treatment, or prevention of disease; prescribed medications; transportation primarily for and essential to medical care; and certain lodging away from home treated as paid for medical care.

You can set up an HSA on your own in much the same way you would establish an individual retirement account or a traditional savings account. You can open your HSA with a lump-sum payment or arrange to contribute on a regular basis. Any money you don’t spend during the year is rolled over for subsequent years. If you are in good health, it’s reasonable to assume that you could accrue a good-sized balance in your HSA over the years.

Eligibility Requirements

To be eligible for an HSA, you must be covered by a qualifying “high-deductible health plan.” Only limited types of additional coverage are permitted, such as coverage for dental and vision care. You may not be enrolled in Medicare.

Contribution Limits

In general, the most you can contribute to an HSA in 2023 is $3,850 with self-only coverage or $7,750 with family coverage. These limits are adjusted for inflation in future years. Your employer or a family member may also contribute to your HSA as long as the total contribution amount does not exceed the limit.

If you are age 55 or older, you can make additional “catch-up” contributions up to $1,000 for 2023 to maximize your savings before you turn age 65 and are qualified to enroll in Medicare.

The Big Advantage — Tax Savings

There are several valuable tax-related benefits to having an HSA:

  • You can claim a tax deduction on your federal income tax return for contributions you (or someone other than your employer) make to your HSA.
  • Contributions to your HSA made by your employer (including those made through a cafeteria plan) may be excluded from your gross income.
  • The contributions remain in your account until you use them.
  • The interest or any other earnings on the account assets accumulate tax free.
  • Distributions you receive from the account to pay qualified medical expenses are tax free.
  • An HSA is portable, which allows it to stay with you if you change employers or leave the workforce.

Your HSA Balance as a Legacy

Your choice of an HSA beneficiary is important. If you pass away and the beneficiary is your spouse, then the account is treated as your spouse’s HSA and your spouse can take tax-free distributions for qualified medical expenses. Basically, the tax-free status of the account continues. If the beneficiary is not your spouse, then the account stops being an HSA and the fair market value of the account becomes taxable to that beneficiary in the year of your death. If your estate is listed as the HSA beneficiary, then the value of the account is included on your final income tax return.

If you meet the eligibility requirements, a health savings account can be a useful tool in your financial planning toolbox. A financial professional can help you look into whether an HSA makes sense for your situation.

Curious to learn more about how a Health Savings Account could be a beneficial savings mechanism for you? Schedule a meeting with our team.

Written By  Heather Jordan
4 Tips to Look into Your Financial Future
Brett Sebion, Financial Coach  – June 06, 2023
You don’t have a crystal ball, so you can’t say for sure what your retirement will look like. What you can do, however, is lay the groundwork now for the type of retirement you want. And that starts with determining where you are in your planning for retirement. It can be helpful to complete these […]
Keep Reading
How to Retire Early
Brett Sebion, Financial Coach  – June 01, 2023
The journey toward retirement is different for everyone, and more Americans are aiming for an early retirement. However, many who would like to retire early are not planning properly to reach this goal. According to the United States Census Bureau, 50% of women and 47% of men who are between 55 and 66 years old […]
Keep Reading
Borrowing from Yourself – Not Always the Best Plan
Heather Jordan  – May 25, 2023
Where can you turn if you need cash in an emergency? Some people turn to their 401(k) plans. After all, you’re borrowing your own money and paying it back to yourself with interest. But taking a loan from your 401(k) plan may put you at risk of not reaching your retirement goals. Before you take […]
Keep Reading

What are you waiting for?

Everything we do boils down to this: by doing what is best for you, we do what’s best for our company. Helping you build financial security and plan for retirement so you can look forward enjoying life.
Open Account right-arrow-dark Sign Up Now right-arrow-dark