Health savings accounts, more commonly known by its acronym, HSA, are one of the most tax-advantaged accounts the IRS recognizes. Read below for more information on what is an HSA, who qualifies, and the advantages gained by setting one up.
What is Health Savings Account (HSA)?
An HSA is a tax-advantaged savings account that is created for people who get their insurance coverage through high-deductible health plans (HDHPs). Contributions to the account made by the employee or employer are tax-exempt income and can be used to pay for qualified medical expenses that are not covered by the HDHPs.
What is considered a High Deductible Health Plan?
For 2021, the IRS defines an HDHP as follows:
- Individuals – minimum annual deductible of $1,400, but not greater than an annual deductible and other out-of-pocket expenses of $7,000
- Family Coverage - minimum annual deductible of $2,800, but not greater than an annual deductible and other out-of-pocket expenses of $14,000
Who Qualifies?
- Covered by a high deductible health insurance plan (HDHP)
- Not covered by any other plan that is not an HDHP
- Not enrolled in Medicare
- Not claimed as a dependent on someone else’s return
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🎇 Benefits of an HSA
- Get a tax deduction for the funds you contribute into an HSA – amounts contributed are deducted from your taxable income
- Withdrawals are tax-free if used for qualified medical expenses (Using funds for non-qualified medical expenses results in taxes and an additional 20% penalty)
- After 59 1/2 you can withdraw money for non-medical reasons but you will pay income tax on the distributions, however, avoiding the 20% penalty.
- Unlike a flexible savings account (FSA), it is not a use it or lose it account, rather, funds contributed roll over from year to year.
- You can invest funds within an HSA in things like mutual funds, stocks, etc. It does not have to just grow at a small savings interest rate. Essentially using it as a retirement account.
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Maximum Contribution – limits on contributions apply to the total dollars contributed by both employer and employee
- 2021 - $3,600 for an individual and $7,200 for a family
- 2022 - $3,650 for an individual and $7,300 for a family
- Individuals 55+ by the end of the tax year can make a catch-up contribution of an additional $1,000
- Contributions can be made until the tax filing due date (April 15 of the year following the tax year)
🔗 Read more about the advantages of an HSA here
