4 Things You Should Know About Health Savings AccountsFebruary 14, 2018 | Financial Wellness
A health savings account (HSA) is used with a high-deductible health insurance plan and can allow users to prepare tax-free for future medical expenses. In addition to helping with medical expenses and potentially reducing taxable income, an HSA could also be a useful retirement preparation tool. Here are four basic things to know about HSAs, how they work and the potential tax advantages.
1. How an HSA works
Companies commonly offer an HSA as part of their employee health coverage. Similar to a checking account, you typically will receive a debit card or checks linked to your account, and you can use it to pay for qualified health care expenses as long as you have the funds to cover those expenses. Your HSA balance rolls over from year to year, so your money can continue to grow. You’re not obligated to “use it, or lose it.”
2. Tax advantages
HSAs have a triple tax advantage if used correctly. Contributions are tax deductible. The money grows tax-free and distributions from an HSA for qualified healthcare expenses are tax-free. There is an annual limit on how much you can contribute per year, but you can either use the money for medical expenses — or let it grow in the account. You can find more information on HSA contribution limits at www.irs.gov.
3. Your health savings account as a retirement preparation tool
It’s important to consider how you’ll save money for health expenses in retirement, and a powerful long term tool could be an HSA. While not technically a retirement plan, there are a lot of similarities between HSAs and the tax advantages associated with qualified retirement plans. HSAs can be invested in stocks, bonds, mutual funds and a wide variety of other investment choices. After age 65, you can withdraw funds for any reason without penalty. Additionally, if you change jobs or transition to a nonqualified health care plan, you will always own and control your HSA money.
4. An HSA may not be for everyone
HSAs do have drawbacks and limitations, including the high deductible health insurance plan requirement and limit on how much you can contribute per year. Additionally, you could encounter unexpected medical costs that exceed what’s saved in your HSA. Money in your HSA should be used for qualified healthcare expenses, in order to take full advantage of tax benefits. Currently, if you use these funds for those non-healthcare or medical related expenses before age 65, you may have to pay income tax on the withdrawal, plus a 20 percent penalty.
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Contributions to your retirement account are deposited into separate accounts, which in turn are invested into the investment options you select. It is not possible to invest your contributions directly in stocks, bonds or mutual funds. These concepts were derived under current tax laws. Changes in the tax law may affect the information provided. For answers to specific questions, consult a qualified tax advisor, attorney, or financial professional.
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