Managing healthcare expenses can be a challenge, especially with rising costs. That’s where Health Savings Accounts (HSAs) come in. An HSA is a tax-advantaged savings account designed specifically for individuals with high-deductible health plans (HDHPs).
It allows you to set aside money for qualified medical expenses, helping you save on taxes while planning for healthcare needs now and in the future. Keep reading the sections below to find out what HSAs are, who can benefit from them, and how to use them to your advantage. Let’s begin by understanding what an HSA is and whether it’s the right option for you.
A Health Savings Account (HSA) is a special savings account that allows individuals with high-deductible health plans (HDHPs) to save money for medical expenses on a tax-advantaged basis. Created in 2003, HSAs help people manage healthcare costs by allowing contributions to grow tax-free and be used for qualifying medical expenses.
To open an HSA, you generally need to meet specific eligibility requirements. These include:
- Enrollment in a High-Deductible Health Plan (HDHP): An HDHP is a health insurance plan with higher deductibles and lower premiums than traditional plans. For 2024, the minimum deductible for an HDHP is $1,600 for an individual and $3,200 for a family.
- No Other Health Coverage: You can’t have other health insurance coverage outside your HDHP, with a few exceptions, such as dental, vision, or disability insurance.
- Not Enrolled in Medicare: Once you enroll in Medicare, you are no longer eligible to contribute to an HSA, though you can still use the funds you’ve already saved.
- Can’t Be Claimed as a Dependent: You must not be claimed as a dependent on someone else’s tax return.
HSAs operate like personal savings accounts but with special tax benefits. Here’s a look at how they typically work:
- Contributions: You, your employer, or a family member can contribute to your HSA. There are annual contribution limits, which for 2024 are $4,150 for individuals and $8,300 for families. If you’re 55 or older, you can make an additional “catch-up” contribution of $1,000.
- Tax Advantages: Contributions to your HSA are tax-deductible, which lowers your taxable income. The money in your account grows tax-free, and withdrawals for qualified medical expenses are also tax-free.
- Qualified Expenses: HSA funds can be used for various medical expenses, such as doctor visits, prescription medications, surgeries, dental and vision care, and even over-the-counter drugs.
HSAs can be especially useful for individuals who want to take more control over their healthcare spending and save on taxes. They often work best for people with high-deductible health plans who are relatively healthy and don’t expect to need frequent medical care. If you can afford to pay for minor medical expenses out-of-pocket, an HSA allows you to save for larger, unexpected costs.
