Perhaps you’ve heard of a Health Savings Account, or HSA, but you’re just not sure if it’s right for you. The good news is that it’s right for just about everyone!!
What is a Health Savings Account?
A Health Savings Account (HSA) is a tax-advantaged account that can be used to cover qualified medical expenses. Money deposited into an HSA is not subject to federal income tax and can be used to pay for out-of-pocket medical expenses. An HSA can only be used in conjunction with a high-deductible health insurance plan. If you are considering enrolling in an HSA, here are some things you need to know.
How Does an HSA Work?
An HSA is a savings account that can be used to cover qualified medical expenses. The money you contribute to your HSA is deducted from your paycheck before taxes are taken out, which means you never pay taxes on the money you contribute. The money in your HSA can be used to pay for out-of-pocket medical expenses, including deductibles, copayments, and coinsurance.
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How Much Can I Contribute?
The amount you can contribute to your HSA each year depends on the type of health insurance coverage you have. For 2022, if you have self-only coverage, you can contribute up to $3,650. If you have family coverage, you can contribute up to $7,300.
For ages 55+, there is a “Catch-up” contribution of an additional $1,000.
Who Can Contribute?
Anyone who has a high-deductible health insurance plan can contribute to an HSA. This includes employees, employers, or even family members.
What Are the Benefits of an HSA?
There are several benefits of contributing to an HSA, including the following:
• The money deposited into your account is not subject to federal income tax.
• The money in your account grows tax-free.
• You never pay taxes on the money you withdraw from your account to pay for qualified medical expenses.
• HSAs are portable, which means they stay with you even if you change jobs or health insurance plans.
• Any money left in your account at the end of the year rolls over into the next year.
• You can use the money in your account to pay for Medicare premiums and other long-term care expenses.
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Contributions made by employees are typically made through payroll deduction, while contributions made by employers are generally made as lump sum payments each year.
Employers may also opt to make contributions based on a percentage of employee wages each month instead of making a lump sum payment each year.
If you are self-employed, you can deduct your HSA contributions from your income taxes.
Even if you are not eligible to make tax-deductible contributions to your HSA because you do not have a high-deductible health insurance plan, anyone can still make contributions to your account as long as they do not exceed the maximum contribution limit for the year ($3,650 for self-only coverage and $7,300 for family coverage).
Anyone who contributes to your account will receive a receipt that they can use when they file their taxes so they can claim any available tax deductions or credits related to their contribution(s). You own and control the money in your account and all decisions regarding how much money to contribute and how to spend the money in the account belong solely to you. You are never required to spend all of the money in your account each year and any unused funds roll over into future years until they are needed.
There is no “use it or lose it” rule with HSAs like there is with some other types of healthcare spending accounts such as Flexible Spending Accounts (FSAs).
Once you turn age 65, you may withdraw money from your HSA for any reason without incurring any penalties. However, regular income taxes will still apply to distributions made for reasons other than qualified medical expenses.
If you withdraw funds from your HSA for unqualified medical expenses before age 65, you will incur a 20% penalty in addition to having to pay ordinary income taxes on those distributions.
After age 65, regular withdrawals can be made without paying any penalties but income taxes will still apply to those withdrawals if they are not used for qualified medical purposes.”
Conclusion: A health savings account can be a great way to save money on healthcare costs, but it’s important to understand how they work before enrolling in one. Contributing to an HSA can help reduce your taxes now and save you money down the road when the funds in the account can be used to pay for Medicare premiums or long-term care expenses. Remember that distributions made from HSAs for unqualified medical expenses are subject to taxes and penalties unless you are aged 65 or older at which point the funds may be withdrawn for any reason without facing these consequences.”
If you have questions about whether or not an HSA is right for you, be sure to contact a financial or taxation expert for the most up-to-date information .”