Harness Money

What is an HSA?

An HSA is known as a health savings account.

The Health Savings Account is a tax-advantaged financial account that individuals can use to save and pay for qualified medical expenses. HSAs are designed to work in conjunction with high-deductible health plans (HDHPs), which are health insurance plans with higher deductibles and lower premiums than traditional health plans.

I have been investing into my HSA for many years and watched as the money within has steadily grown.

An HSA is a great way to save for medical expenses and grow your wealth. But it not for everyone HDHPs are not the right health plan for individuals that will be visiting the doctor on a regular basis or some families, because you will pay more out of pocket for your yearly medical costs.

If you steadily add more money into your HSA it can have a big impact in the long run.

Here are some key features and aspects of HSAs:

1. Tax Advantages: Contributions to an HSA are tax-deductible, meaning you can deduct the amount you contribute from your taxable income when filing your taxes. Additionally, any interest or investment earnings on the funds within the HSA grow tax-free. When you use the funds for qualified medical expenses, withdrawals are also tax-free.
   
2. Contribution Limits: There are annual contribution limits set by the IRS. Click here for more IRS – HSA information. These limits may be adjusted each year for inflation. The limits apply to the total contributions made to the HSA, including both your contributions and any contributions made by your employer. In 2024, the HSA limit is $4,150.00
   
3. Ownership and Portability: HSAs are individually owned, which means the account is yours even if you change jobs or health insurance plans. The funds in the account are portable and can be rolled over from year to year, unlike Flexible Spending Accounts (FSAs) where funds may be forfeited at the end of the year.
   
4. Qualified Medical Expenses: HSA funds can be used to pay for a wide range of qualified medical expenses, including doctor visits, prescription medications, certain medical procedures, and other eligible healthcare expenses. It’s essential to check the IRS guidelines for a comprehensive list of qualified expenses.
   
5. High-Deductible Health Plan (HDHP): To be eligible for an HSA, you must be enrolled in a high-deductible health plan. HDHPs typically have higher deductibles and lower premiums than traditional health insurance plans. The idea is that individuals use their HSA funds to cover out-of-pocket expenses until they reach their plan’s deductible.
   
6. Rollover and Portability: Unlike Flexible Spending Accounts (FSAs), which may have a “use-it-or-lose-it” policy, HSA funds can roll over from year to year. This feature allows individuals to accumulate savings for future healthcare needs over time.
   
7. Withdrawals for Non-Medical Expenses: While HSA funds used for qualified medical expenses are tax-free, if you withdraw funds for non-medical expenses before the age of 65, you may be subject to income tax and a 20% penalty. After age 65, you can withdraw funds for non-medical expenses without the 20% penalty, but they will be subject to income tax.

a Health Savings Account (HSA) stands as a valuable financial tool offering tax advantages to individuals seeking to save for qualified medical expenses. Paired with high-deductible health plans (HDHPs), HSAs provide an avenue for individuals to accumulate funds while enjoying tax benefits on contributions, earnings, and withdrawals for medical expenses. The individually-owned nature of HSAs ensures portability, allowing account holders to retain ownership even amid changes in employment or health insurance plans. The ability to roll over funds from year to year distinguishes HSAs from other accounts, fostering long-term savings for future healthcare needs.

However, it’s crucial to recognize that the suitability of HSAs depends on individual circumstances. While the tax advantages and potential for wealth growth make HSAs appealing, individuals with frequent medical needs may find the associated high out-of-pocket costs under HDHPs less favorable. Contribution limits, which are subject to annual adjustments, should also be considered.

Navigating the landscape of qualified medical expenses, adhering to IRS guidelines, and understanding withdrawal implications are essential for maximizing the benefits of an HSA. The power of steady contributions to an HSA is underscored by the potential long-term impact on financial well-being.

Before embarking on an HSA strategy, individuals should align this approach with their overall financial goals. Awareness of ever-evolving rules and regulations surrounding HSAs is crucial. As with any financial decision, due diligence and consideration of personal circumstances will ensure that an HSA serves as a valuable asset in one’s financial portfolio.