A health savings account (HSA) is a personal healthcare account that is funded by the account holder to be used to cover qualifying health products and services. Unlike a flexible spending account (FSA), health savings accounts do not have deadlines and funds roll over from year to year making them great supplementary savings accounts for the future. For 2022, you can contribute up to $3,650 to an HSA if you participate in your health plan on an individual level, and up to $7,300 for family health plan coverage.
HSAs belong to (and are managed by) the account holder, so if you leave a job where you have contributed to an HSA, it’s a portable asset that can come with you to your next position. This makes it a great option for self-employed individuals.
But HSAs are only available in tandem with high deductible health plans (HDHPs), and you can only contribute to an HSA if you’re enrolled in one. Keep this in mind when planning and enrolling for the upcoming year.
An HSA is both a means of covering qualified healthcare expenses and a savings vehicle that can help you cover both medical and non-medical expenses in retirement. First, if you’re enrolled in an HSA through your job and it’s funded through regular payroll deductions, this will reduce your taxable income and help you save money each year.
Or, if you make a contribution with post-tax funds, you can deduct these contributions from your gross income on your tax return, which could also save you money annually! But where HSAs really shine is their triple-tax benefit. Here’s how it works:
- HSA contributions are not taxed
- There’s no tax on interest earned or growth through investment
- There’s no tax on HSA withdrawals for qualified health expenses
But this goes even further when you start to analyze an HSA’s retirement potential. HSA funds roll over year to year, so any unspent funds will accumulate over time. You can withdraw these funds for non-medical expenses, but we don’t recommend it, as you will have to pay a 20% penalty on that amount back to the IRS plus payroll taxes on the amount.
Here’s where things get very interesting. Once you reach age 55, you can add a “catch up” contribution, which allows you to add up to $1,000 to your HSA above the yearly contribution limit. Once you reach Medicare eligibility at age 65, something amazing happens - the 20% tax penalty for non-medical expenses is waived.
Once you reach 65, the tax benefit still holds — there’s no tax on withdrawals for qualified expenses, but withdrawals for non-medical expenses are taxed as income. If you’ve been diligently saving throughout the course of your career, an HSA can provide a massive supplement to traditional retirement savings accounts to bolster your long-term savings potential.
Finally, HSAs are a fantastic introduction to investing. Depending on your sense of risk and adventure, HSA funds can be invested in stocks, mutual funds or other assets through a variety of banks and brokerage services, all of which can help account holders grow this asset at a much faster rate than via interest alone.
Additionally, because individuals and families can have more than one HSA at once (as long as they both do not exceed the yearly contribution limit), they could theoretically use one for covering health costs, while the other is primarily for investing.
Product and service eligibility requirements for HSAs are laid out by the Internal Revenue Service (IRS). To be eligible, all products and services must fall under the IRS’s definition of “medical care” IRS Tax Code 213(d):
“The term “medical care” means amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”
So what is an HSA eligible product or service under that definition? There are way too many to list here (but this list covers it all). In short, HSA dollars can be used to pay for:
- Prescription medicines
- Doctor’s co-payments and specialist visits
- Prescription eyeglasses and contact lenses
- Over-the-counter medicines
- Menstrual care products
- First aid supplies
- Dental/vision expenses
- Medical diagnostic products
- Home health care items
And don’t forget, any money that you don’t spend on healthcare needs over the course of the year will roll over to the next year and can continue to be saved while earning tax-free interest!
HSAs are the fastest-growing consumer-directed healthcare accounts in America today with the ability to cover immediate and long-term healthcare expenses, while also helping you fund medical and traditional retirement expenses. We created HSA Store in 2016 to provide this growing population of account holders with the web’s largest selection of exclusively HSA eligible products, comprehensive account tools and resources, and 24/7 customer service.
Whether you’re offered an HSA option through your employer, or looking to set one up on your own, HSA Store can help you every step of the way.