What are Health Savings Accounts and How Should They Be Used?
Income and Deductibles
Typically, those who opt for an HSA have a high deductible that they likely wouldn't be able to pay if they didn't make provisions over time to do so. For example, if a person makes $30,000 a year after taxes and they have a $6,000 deductible, then they would be giving up a full 20% of their income if they have major medical expenses.
HSAs are commonly offered by health insurance companies, so an individual can sign up for the account simultaneously to signing up for their health insurance plan. The government is incentivizing policyholders to prepare for emergencies, so there are fewer delinquent policies. If your insurance policy doesn't offer an HSA option, it's possible to open a separate account at practically any financial institution.
Reducing Your Taxable Income
Having money taken out of your income tax-free is a way to reduce the amount of taxable income you make a year. It helps you maximize your income while simultaneously safeguarding against emergency health situations. Individuals who contribute $2,000 to their HSA a year will be taxed as though they make $2,000 less than their standard income. The money you contribute to your HSA will roll over from year to year, which means the insured can grow their emergency funds over time. While these funds typically can't be used to pay for insurance premiums, they can be used to pay for co-pays, deductibles, and other eligible non-covered expenses.
The government has placed restrictions on how much a person can contribute to their HSA based on their age and marital status, and these restrictions change every year. For individuals, the current maximum is $3,550 and $7,100 for a family.1 Adults over the age of 55 are allowed to contribute an extra $1,000 or more. If you choose to open an HSA, you must make contributions in cash as opposed to other types of property, including stocks or bonds. Employers and family are allowed to contribute to an HSA on behalf of the individual. The contribution limits for employers generally change every year as well.
How to Use It
Some people use their HSA as a straight savings account while others may choose to invest the money in mutual funds or stocks. In fact, some financial experts view the HSA as a better financial move than investing in a typical retirement account. When it comes to an IRA, individuals are required to withdraw from the account once they reach the age of 70.5, but an HSA allows people to continue contributing to it tax-free with no such requirement. The income deposited is also not subject to the FICA tax that goes toward social security and Medicare, while an IRA would be subject to the additional tax. HSAs are also allowed to be used for non-eligible expenses, though they will be taxed as income if the individual chooses to do so.
An HSA can be helpful for anyone who hopes to be able to pay their health insurance expenses immediately. They may be more commonly chosen by those with high deductibles, but the truth is that practically anyone can benefit from the tax-free incentives if they so choose.
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