About Health Savings Accounts
The Short Answer: An HSA is a tax free savings account that allows you to set aside pretax money to cover health care not covered by your insurance. To be eligible for an HSA in 2020, you must have a qualifying, high-deductible health plan (HDHP) with an annual deductible of at least $1,400 for an individual or $2,800 for a family. You can’t contribute to an HSA if you’re enrolled in Medicare or a dependent listed on someone else’s tax return.
The HSA Triple Tax Advantage
The first thing to know about an HSA is that they offer a triple tax advantage:
- Contributions are tax-deductible, so they reduce the federal income tax you owe.
- Savings in an HSA grow tax-free.
- Money can be withdrawn from an HSA without being taxed if you use the money for qualified medical expenses.
Most states follow the federal tax rules for HSAs, with the notable exception of California.
What Expenses Do HSA Accounts Cover?
Generally, you can use HSA funds to pay for any doctor or dentist visit, prescribed medicines and prescribed treatments. This would include things like drugs, eye care, nursing care, labs and medical devices. Items not covered include drugs from outside the US, cosmetic surgery, and health club memberships.
You can accumulate savings in an HSA to cover your health care expenses in retirement. That’s in addition to Medicare. So it’s a great retirement savings tool. But be aware that if you withdraw any HSA money for anything other than qualified expenses, you must pay income tax on that money.
How Much Can I Contribute To My HSA In 2020?
Under 2020 HSA rules, the annual contribution cap is $3,550 for individuals and $7,100 for families. The amount your state allows could be different.
Also know that your employer can contribute funds to your health savings account too, and you don’t pay federal income tax on that money. But the total funds deposited by you and your employer together each year can’t exceed the annual limit.
Some employers use HSA contributions as a wellness incentive. To get the full employer contribution, employees might have to do things like sign up for health screenings, get a flu shot or participate in wellness programs.
What’s The Difference Between An HSA And FSA?
Both HSAs and flexible spending accounts (FSAs) can be used to pay for out-of-pocket health care expenses with pretax dollars. But with an FSA, you must spend that money each year or you lose it.
HSA don’t work that way. HSA money is yours forever and you can even leave it to your heirs! And it doesn’t have to sit in a money market account. You can invest your HSA savings into things like mutual funds or index funds.
Can You Open An HSA Account On Your Own?
Yes, you can sign up for an HSA through your employer and you can open a health savings account on your own. If you are not satisfied with your employer’s offerings, you can transfer your account to another administrator or bank.
Some key facts:
- There is no deadline to sign up for an HSA.
- An HSA must be set up before you can claim an expense.
- You can use any HSA administrator you choose, so shop for the best rates.
Can I Transfer My HSA To Another Bank?
Yes. The money in your HSA belongs to you, and you can keep it with any qualified administrator or bank that you like.
You will need to keep account documentation for tax time, but there is no limit on how much you transfer from one qualified HSA account to another.
Can HSA Money Be Invested?
Yes. You don’t have to invest your HSA funds in a low-yielding money market fund. You can invest in mutual funds, ETFs, stocks or other investments available through a self-directed brokerage account. If your current HSA administrator doesn’t offer competitive rates or the options you want, find another HSA administrator.
Even if you’re in a low tax bracket, you will still get a tax benefit from saving in an HSA . It’s the only triple-tax advantaged savings option available.