The majority of people use their HSAs to pay for qualified medical expenses but don’t realize you can do so much more. For instance, did you know that most HSAs offer a way for you to invest your funds while you are not using them? How about the fact that your contributions and distributions are tax-free*? HSAs are more than just a way to pay for medical expenses, they are a great solution to help reach your financial goals.
In order to qualify for an HSA you must be covered under a high deductible health plan (HDHP), have no other health coverage**, must not be enrolled in Medicare, and can’t be claimed as a dependent on someone else’s tax return.
One of the best features of an HSA is that contributions can come from just about anyone - this includes you, your spouse, your employer, family members, and more. In fact, the funds contributed by your employer to your HSA are not included in your gross income - free money, yes please. Do keep in mind that there are contribution limits. The amount depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. For 2021, if you have self-only HDHP coverage, you can contribute up to $3,600. If you have a family HDHP coverage, you can contribute up to $7,200. For eligible individuals age 55 or older, contribution limits are increased by $1,000 at the end of your tax year.
You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. For more information on qualified medical expenses, review IRS Pub. 502, Medical and Dental Expenses. Did you know that you can’t pay for insurance premiums using an HSA but you can use it to pay for Long-term care insurance? Of course, there are some limitations based on age and the amount is adjusted annually but this can save you some money.
HSAs have a triple-tax advantage. First, many people contribute pre-tax dollars to HSAs through payroll deductions. If you have an HSA outside of your workplace, contributions can be used as a deduction from your taxes. Second, interest or other earnings on the assets are tax-free. Third, when you use the funds for qualified medical expenses the distributions are tax-free.
I could easily have an entire series of articles on the advantages of HSAs but everyone’s situation is different. Let’s talk specifics about how you can use an HSA to boost your financial wellbeing - book your appointment with KJ Dykema, MRFC® today.
* Some exceptions apply. Review IRS Publication 969 to learn more.
** Except what is permitted under IRS Publication 969, Other health coverage.
Publication 969 (2020), Health savings accounts and other tax-favored health plans. Internal Revenue Service. (2021, February 16). https://www.irs.gov/publications/p969.
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