A Health Savings Account, commonly referred to as an HSA, is a type of interest-bearing savings account that lets you set aside pre-taxed or after-tax money* to pay for qualified medical expenses. If you do not need to use the money for medical expenses, you can let the money continue to grow over time. In order to qualify for an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP).
Advantages of a Health Savings Account
- Can help cover out-of-pocket medical expenses usually associated with a high-deductible plan. There is a wide range of medical, dental and mental health services that are eligible for coverage under IRS Publication 502.
- The option of pre-tax contributions or tax-deductible after-tax contributions can offer tax advantages depending on your situation. Pre-tax contributions are made with pre-tax dollars and as a result, are not included in your gross income and not subject to federal income taxes. After-tax contributions can be deducted from your gross income on your tax return which may help reduce your tax bill for the year.
- Your HSA account is portable, meaning the money in your HSA remains available even if you change health insurance plans, change employers, become unemployed, or retire. You can also rollover any money you have at the end of the year to the next year.
- Contributions to the HSA can be made by other people – your employer, a relative, or anyone who wants to add to the account. There are limits set by the Internal Revenue Service and that can change yearly. For a detailed explanation on the existing limits, visit the Internal Revenue Service. If you are 55 or older, you can contribute an extra $1,000 a year (catch-up contribution).
Disadvantages of a Health Savings Account
- In order to qualify for an HSA, you have to participate in a High-Deductible Health Plan. You may pay a lower premium for a high-deductible plan, but that usually means it doesn’t cover anything other than preventative care. You would need to pay for all medical expenses upfront until your deductible is met.
- If you decide to withdraw funds for non-qualified expenses before the age of 65, you will owe taxes on the money, plus a penalty (usually 20%). Some HSAs have a monthly maintenance fee or a per-transaction fee.
- Good record keeping is important as you would need to keep all your receipts to prove that withdrawals were used for qualified medical expenses.
*Please consult a tax advisor.
Please note: This information is designed to offer a general understanding of common financial terms and practices and should not be considered financial advice from Charter Oak Federal Credit Union. Every individual has different financial needs and goals, which should be discussed with a financial professional.