If you are eligible, a health savings account can help offset the cost of health care. An HSA offers triple tax breaks – you can use pre-tax income to help your savings grow tax-free, and you can use tax-free funds for qualified medical expenses.
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In addition to the triple Tax breaks, Contributions to an HSA do not expire. You can keep the account until you retire and use it as an additional savings account.
Below you will learn what a health savings account is and how it works.
What is a health savings account?
A health savings account, also known as an HSA, is a type of tax-free savings account. It helps qualified people who Medical care costs. Not only do you put pre-tax money into an HSA, but you can make tax-free withdrawals – as long as you use the money for qualified medical expenses.
Who can get an HSA?
You must have high deductible health insurance. HDHPs have lower monthly premiums but also require you to pay more out of pocket. The combination of HSA and HDHP can help you save healthcare costs.
Good to know
According to the IRS, with a few exceptions, you cannot have any other health insurance to qualify for an HSA. You may also not have Medicare coverage or be listed as dependent on someone else tax declaration.
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How does an HSA work?
With an HSA, you have two options. One is an employer-sponsored account that you contribute to with your pre-tax income. Your other option is a customized HSA. With this type of account, you contribute with after-tax money – but your contributions are tax deductible.
Contribute to your HSA by making payroll deductions, making online bank transfers, or filing a check. To access your HSA, you can use an HSA debit card or a check linked to your HSA account. You can also reimburse yourself for qualified expenses via online transfer.
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What should be considered with HSAs?
While you don’t need approval from the IRS to open an HSA, there are still a few rules in place. First, you must have an HDHP to qualify. For 2021, that means a health insurance plan with a deductible of $ 1,400 for individuals and $ 2,800 for families. There are a few other things to consider with an HSA, as detailed below.
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Contribution limits and overruns
People with HDPD auto insurance can contribute a maximum of $ 3,600 to their HSA. Family members can deposit up to $ 7,200. If you have an employer-funded HSA, your employer can top up your contributions. These contributions will count towards your maximum limits.
If you deposit more than the maximum amount allowed under your plan, the excess may be subject to 6% excise tax. Withdraw some of your excess premiums and avoid paying excise tax if you meet certain IRS requirements.
Withdrawals and taxes
If you use HSA on qualified medical expenses, these withdrawals are tax free. You can use the money for your medical care or medical care for a spouse or dependent child that is listed on your tax return.
All withdrawals for unqualified expenses are not tax exempt. If you use the funds in your account on something that doesn’t qualify, those withdrawals will be subject to a 20% tax penalty. However, if you are over 65 years of age, this penalty does not apply.
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How do you set up an HSA?
You must first register with an HDHP and then open an HSA. You have a few options:
Compare HSA provider options. Different providers may have different methods of depositing.
What are the pros and cons of an HSA?
Here are the pros:
If you change jobs, you can take your HSA with you.
You don’t pay tax on the money you deposit, and you can withdraw funds for qualified medical expenses tax-free.
Your employer can fund your account.
Your money is carried over every year.
Your HSA can serve as an extra Pension fund.
Here are the cons:
Withdrawals for non-medical and non-qualified medical expenses are subject to a 20% tax penalty.
You may have to pay fees for your account, such as: B. Maintenance Fees.
You need a qualifying HDHP to qualify.
Your contributions may not cover all of your medical expenses.
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If you have an HDHP, you may still have to pay quite a bit before your insurance goes into effect.
An HSA can help you offset the cost of healthcare, making the medical care you need much more affordable.
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Andrew Lisa contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: What Is an HSA and Why Do You Need One?