Health savings accounts allow people on high-deductible health plans to easily cover out-of-pocket medical costs. An HSA is a federally insured savings account offered by institutions such as banks, credit unions and financial benefits companies.
Contributions to your health savings account are tax-free, and you can also make tax-free withdrawals and payments for your eligible medical expenses. Additionally, an HSA is a reliable, low-risk and fair-return savings account you can leverage to save for your future and earn tax-free interest.
Below are more reasons you should consider opening an HSA.
How a Health Savings Account Works
To be eligible for a health savings account, you must not have any other health insurance plan besides the HDHP. The HDHP is a health plan with lower premiums and higher deductibles than a standard insurance plan. It covers preventive services, leaving you to pay some out-of-pocket expenses until you reach your deductible, then paying off the balance.
An HSA helps you save for and afford the out-of-pocket medical expenses not covered by your HDHP. You can make your HSA payments directly from your payroll pre-tax or make tax-deductible contributions. The higher your contribution, the more tax you save.
The money in your HSA earns interest over time. When you reach a given minimum, you can reinvest your savings in stocks, bonds and other self-directed IRAs. The reinvested savings continue to earn a tax-free income.
Benefits of Having a Health Savings Account
Below are the top four advantages of opening a health savings account with a reliable and low-fee HSA provider.
1. Provides Unmatched Flexibility and Control
An HSA allows you to plan your medical expenses and retirement your way. In this federally insured savings account, the money is yours for life — regardless of whether you retire, change employers, change health care plans or drop the HDHP plan. Even when you’re uninsured, unemployed and unable to make contributions, you can still access your health savings for medical and other expenses.
Your savings also roll over year-to-year and don’t expire like a flexible savings account typically would. You choose when and how to use your savings. You can even use your HSA to cover ineligible medical and non-medical expenses. However, withdrawals not used for uneligible expenses are subject to income tax and a 20% penalty for people under 65.
The funds are available to you now and in the future. They can also cover qualified medical expenses for dependents you claim on your taxes. Interestingly, anyone can contribute to your HSA, including yourself, employers, your spouse, friends and relatives.
2. Offers a Triple Tax Advantage
With a health savings account, you enjoy three tax savings.
- Contributions: HSA contributions are not subject to federal income taxes. You can make pre-tax or after-tax contributions, in which case the amount is tax-deductible from your annual income.
- Withdrawals: Withdrawals used to cover qualified medical expenses are tax-free.
- Interest: The savings in your account gain a slight interest, and you can reinvest them to earn a higher interest, all tax-free.
There’s a catch. Spending your HSA money on non-medical or unqualified expenses, such as paying premiums for Medigap policies, Medicare supplemental and other insurance policies, subjects you to a 20% penalty. The Internal Revenue Service also requires you to pay regular income tax on uncovered expenses. People above age 65 can spend their HSA however and whenever they want.
Additionally, those receiving unemployment compensation can use HSA to cover COBRA continuation coverage without penalties. Another exempt category is people using their savings to pay for long-term care insurance.
Tracking your HSA expenses by maintaining receipts and other documentation can help you avoid paying penalties and income taxes.
3. Low Monthly Contributions
Pairing a high-deductible health insurance plan with an HSA can lower your monthly health insurance contributions while ensuring you can conveniently cover your out-of-pocket medical expenses. It saves you a significant amount of your earnings that go toward exorbitant health insurance premiums. It also lowers your tax bill by ensuring your employer does not withhold income tax on HSA contributions.
The IRS has set reasonable contribution limits for individuals and families, which they review yearly. In 2023, individuals contribute up to $3,850 and families up to $7,750. The limits for 2024 are $4,150 for individuals and $8,300 for families. Taxpayers 55 years or older pay an additional $1,000, considered a catch-up contribution.
The best part about a HSA is that you can contribute at any time of year. However, you must make all your contributions before the current year’s tax return due date.
4. Earn Tax-Free Returns
A self-directed HSA is a reliable individual retirement account that earns you a small amount of interest every day your money sits there. The tax-free interest compounds monthly, subject to your account’s applicable rate.
You can gain more federal tax-free earnings by investing part of your HSA savings into financial securities like bonds and stocks. However, you must follow health savings account rules and adhere to IRS regulations for investing with your HSAs and other retirement accounts. Among the HSA rules is reaching a minimum balance in your account and leaving enough money to meet your current and future health care costs.
When using your HSA as an alternative investment vehicle, you must factor in your risk tolerance and time horizon. Seeking advice from financial experts can help you make the best decision with your idle savings.
Set up Your Health Saving Account Today With Accuplan HSA
The Accuplan HSA is a modern and personalized health savings account that lets you save and earn on idle funds. We are world-class professionals who help you reduce your monthly health insurance premium and save on taxes with an HSA. We’ve been in the retirement industry for over three decades, specializing in self-directed IRAs and estate planning. We leverage our experience to help you invest your HSA savings for retirement in a way that works for you.
Our clients at Accuplan Benefits Services appreciate our low-to-no-cost HSA structure with no hidden fees. They also love our easy-to-use portal for tracking expenses and facilitating fast self-reimbursement. If you’re ready for more tax-free earnings on your HSA, fill out an application form today. You can also contact us with any follow-up questions about our HSA account offerings.