High deductible health insurance plans might seem costly up front, but they offer an opportunity for long-term investment via health savings accounts (HSAs). In a decade, HSA holdings leaped from $16 billion to $104 billion.
Differentiating between HSA and FSA
During your employer’s open enrollment period, it’s essential to distinguish HSAs from flexible health spending accounts (FSAs). While FSAs come with some tax perks, they demand expenditure before a set deadline and don’t transfer between jobs. HSAs, however, provide more extensive tax benefits, allow for fund rollovers each year, and are portable between jobs.
Key advantages of HSAs
- Tax benefits that count: Contributions directly reduce your taxable income. Funds grow free from federal tax and remain untaxed when withdrawn for qualifying expenses. While states like California and New Jersey do tax HSAs, the overarching federal benefits can make them worthwhile.
- Flexibility in your pocket: HSAs follow you, even between jobs. Additionally, there’s no expiration on funds; unspent money simply rolls over to the next year.
- Understanding eligibility: Not everyone qualifies for an HSA. For 2023, eligibility requires health insurance with a deductible of at least $1,500 for single coverage and $3,000 for families.
The untapped potential of HSAs
HSAs offer clear benefits, yet many don’t leverage them. A 2020 study disclosed that a third of those with eligible plans hadn’t opened an HSA. Some might prioritize immediate medical costs, neglecting long-term savings opportunities. Notably, a mere 12% of account owners ventured beyond cash assets for their HSA investments.
Using an HSA can yield substantial tax savings. For instance, a 40-year-old New Yorker earning $100,000 annually could pocket around $1,390 in tax savings with an HSA. Moreover, individuals with the means to invest their HSA funds long term can significantly bolster their future wealth.
Additional perks for seniors
Individuals aged 55 or older can add an extra $1,000 to their HSAs each year. Once enrolled in Medicare, contributions cease, but the accumulated funds can cover medical expenses. After turning 65, non-medical withdrawals are taxed as regular income, sans penalties.
Making the most of your HSA
HSAs cover a diverse array of medical costs. During the pandemic, the list of qualifying expenditures expanded to include items like tampons and over-the-counter medicines. If you decide to pay for these expenses upfront, you can always reimburse yourself from the HSA at a later date. Always retain thorough records for taxation purposes.
Looking ahead: the evolving landscape of HSAs
The H.S.A. Modernization Act, currently before the House of Representatives, might soon further augment HSA benefits by raising the yearly contribution limits.
In sum, while they may seem complex at first glance, understanding and harnessing the advantages of HSAs can provide both immediate and long-term benefits. Whether for current medical costs or future investments, HSAs present a versatile and tax-efficient option worth exploring.