I want to contribute to a health savings account to help increase my retirement savings, but I would like to better understand how they work. What can you tell me?
Nearly 60
Dear almost,
A health savings account, or HSA, is a fantastic financial tool that can help you build a tax-free reserve of money for medical expenses now and after you retire. But to qualify, you must be enrolled in a high-deductible health insurance plan. Here’s a look at how they work and how you can open one.
HSA rules
HSAs have become very popular in recent years as the cost of health care continues to skyrocket and because more Americans have high-deductible health plans.
The big advantage of an HSA is the triple tax advantage it offers: your HSA contributions can be deducted pre-tax from your salary, thereby reducing your taxable income; the money in the account grows tax-free; and if you use the money for qualified medical expenses, withdrawals are tax-free.
And if you change jobs, the HSA grows with you.
To be eligible, you must have a health insurance policy with a deductible of at least $1,500 for an individual or $3,000 for a family in 2023. In 2024, the deductible is $1,600/individual or $3,200/family.
This year, you can contribute up to $3,850 if you have individual health insurance coverage, or up to $7,750 for family coverage. Next year (2024), you’ll be able to contribute much more, up to $4,150 for individual coverage or up to $8,300 for family coverage. And people aged 55 and over can save $1,000 more each year. But you can’t contribute after you sign up for Medicare.
The money can be used for out-of-pocket medical expenses, including deductibles, copayments, Medicare premiums, prescription drugs, vision and dental care, and other expenses (see IRS.gov/pub/ irs-pdf/p502.pdf, page 5, for a complete list) either now or when you retire, for you and your spouse as well as for your tax dependents.
Unlike a flexible spending account, an HSA doesn’t require you to use the money before the end of the year. Instead, HSA funds roll over from year to year and continue to grow tax-free in your HSA account for later use.
In fact, you’ll receive a greater tax benefit if you use other cash for current medical expenses and grow HSA money over the long term. Be sure to save your medical expense receipts after you open your HSA, even if you pay those bills in cash, so you can claim the expenses later. There is no time limit on withdrawing tax-free money for qualified medical expenses you incurred at any time after opening the account.
But be aware that if you use your HSA funds for non-medical expenses, you’ll have to pay taxes on the withdrawal, plus a 20% penalty. The penalty is waived for those 65 and older, however, but you’ll still pay ordinary income tax on withdrawals not used for qualified expenses.
How to open an HSA
You should first check with your employer to see if they offer an HSA and if they will contribute to it. Otherwise, you can open an HSA with many banks, brokerage firms, and other financial institutions, provided you have a qualified high-deductible health insurance policy.
If you plan to grow your money in the future, look for an HSA administrator that offers a portfolio of mutual funds for long-term investing and has low fees. Some of the top-rated HSA providers in 2023 are Lively, HealthEquity, OptumBank, Fidelity, HSA Bank, and Bank of America.
After setting up your HSA plan, adding money is pretty simple. Most plans allow you to make online transfers from your bank, send checks directly, or set up payroll deduction if your employer offers it. To access your HSA funds, many plans offer a debit card and most allow redemption.
Send your senior questions to: Savvy Senior, PO Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of the book “The Savvy Senior.”
Send your senior questions to: Savvy Senior, PO Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of the book “The Savvy Senior.”
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