A health savings account (HSA) is an often-misunderstood savings vehicle that gets confused with a flexible spending account (FSA). Until you understand some of the benefits of an HSA, you too may overlook benefits including triple tax savings, investment options and portability.
HSAs were introduced as part of the Medicare Prescription Drug, Improvement and Modernization Act in 2003. These plans are open to individuals enrolled in a high deductible insurance plan (HDHP) as a means to offset the costs of healthcare. The IRS sets contribution limits on an annual basis. For example, the maximum contribution for 2021 is $3,600 for an individual and $7,200 for a family. Like a retirement investment account, individuals over age 55 can contribute another $1,000 annually as a catch-up contribution.
HSAs are the triple threat of the healthcare world when it comes to taxes. First off, contributions to your HSA are tax-deductible. This means you can shave these funds from your reported pay at year end, reducing your overall taxable income. Additionally, the money put into your HSA account grows tax-free. Unlike other investment accounts, you are not taxed on capital gains in an HSA. And finally, withdrawals from your HSA to pay for eligible healthcare expenses are tax free. In short, you get more for your money with an HSA account.
Unlike our friend the FSA, an HSA offers savings and investment options. The investment alternative is unique to an HSA and creates an opportunity for you your money to grow while sitting in your account. The investments available to you are specific to the HSA provider but can include options like stocks, bonds, treasuries, or funds. It should be noted that investments carry an inherent risk, and your contributions could decrease in value if you choose an investment that does not fare well. This benefit is particularly attractive to investors who have maxed out their retirement options and are looking for other ways to invest with a long-term outlook.
Some people shy away from an HSA because they had a bad experience with the FSA “use it or lose it” rule. To bring you up to speed, standard regulations do not allow FSA account holders to roll over any remaining funds from year to year. Any money left in the account at year end is forfeited to the plan. This type of estimation error would leave anyone with a stomachache. This is yet another delightful difference between the two plans. Money in an HSA rolls over year to year. As an added perk, you maintain ownership of the account after you stop contributing or are no longer registered in an HDHP. HSAs are portable! This means you can use the funds for qualified healthcare expenses long after you stopped contributing to the account.
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