What’s an HSA and How To Save Money With It?

Any type of money you can save is an important step to painting a brighter financial picture in the future. Though many options are available as to where you can squirrel away your nuts for winter, sometimes having an account designed for specific needs can go a bit further for your long-term plans.

Read More: 6 Genius Things All Wealthy People Do With Their Money

Quick Take: What’s an HSA and How Does It Work?

A health savings account, or HSA, is a type of tax-free savings account. It helps eligible individuals pay for qualified medical care. Not only do you put money before income tax into an HSA, but you can also make tax-free withdrawals — so long as you use the funds for qualified healthcare expenses. Here are some key takeaways:

• While you don’t need authorization from the IRS to open an HSA, there are still some rules to this investing option.

• You must first have an HDHP to qualify.

• In general, that means a health insurance plan with a $1,400 deductible for individuals and $2,800 for families.

• It is a great savings option that is tax-advantaged for medical expenses.

• You contribute through payroll deductions, making online transfers or submitting a check. To access your account, you can use a linked debit card or a check connected to your account.

• You may also reimburse yourself for qualified out-of-pocket expenses using an online transfer.

• In addition to the triple tax break, your contributions don’t expire. You can keep the account through retirement and use it as an extra savings account.

Health Savings Account: Pros and Cons

As with any savings account, there are benefits and disadvantages. Here are some key pros and cons to consider when choosing your health savings account.

How an HSA Can Save You Money

You have two options for an HSA. One is an employer-sponsored account, which you contribute to with pre-tax income with minimum deductibles. Your other option is an individual HSA. With this type of account, you contribute with taxable income — but your contributions are tax-deductible.

Saving money on taxes makes a big difference in the long-term execution of your financial plan. If you qualify, a health savings account could help you to offset the cost of healthcare expenses. An HSA provides a triple tax break:

• You can contribute to it with pre-tax income.

• Your savings grow tax-free.

• You can use funds for qualified medical expenses tax-free.

Who Can Get a Health Savings Account?

You must have a high-deductible health plan. HDHPs come with lower monthly premiums, but they also require that you pay more out of pocket in a plan year. The combination of HSA funds and an HDHP spending account can help you to save money on healthcare costs, especially if you are enrolled in Medicare.

Who Can Contribute to an HSA?

You should be aware that there are a few requirements for eligibility of who can contribute to a health savings account. These rules apply to you even if you have the necessary health plan. You are permitted to contribute to an HSA only if you meet the following requirements:

• If you are claimed as a dependent on someone else’s tax return you cannot contribute.

• You can’t be enrolled in another health plan that is owned by your spouse or parent and isn’t HSA eligible.

• If you aren’t enrolled in Medicare you can’t contribute to an HSA.

HSA Contribution Limits

Though a savvy way to save for future healthcare costs, an HSA does come with some contribution limitations. Here are some things to consider:

• Those with self-only coverage under an HDHP can contribute a maximum of $3,850 to their HSA.

• Those with family coverage can contribute up to $7,750. If you have an employer-sponsored account, your employer may match your contributions.

• Both you and your employer can contribute to your account but keep in mind employer contributions do count toward your maximum limits.

• If you contribute more than the maximum amount allowed based on your plan, the excess amount may be subject to a 6% excise tax.

• You may withdraw some of your excess contributions and avoid paying the excise tax if you meet specific IRS requirements.

• Once you reach age 55 you can add $1,000 to your contribution.

• Your total contribution can be reduced based on when you enroll in the HSA-eligible health plan and how long you stay enrolled.

• Tax day is generally your deadline for contributing to your HSA for the previous tax year. For example, to contribute fully to your HSA for the tax year 2023, you need to have done so by the federal tax filing deadline of April 15, 2024.

Withdrawals and Taxes

When you use an HSA for qualified medical expenses, those withdrawals are tax-free. You can use the money for your medical care or the medical care of a spouse or dependent children included on your tax return.

Any withdrawals for non-qualified expenses aren’t tax-free. If you use the funds in your account for anything that doesn’t qualify, those withdrawals are subject to a 20% tax penalty. If you’ve turned 65 or are over that age though, that penalty doesn’t apply.

How To Open an HSA

Before you enroll, be sure to compare provider options, as different providers may have varying methods for making deposits. To establish an HSA, you need to enroll in an HDHP first — after that, you have a few options:

1. Ask your bank.

2. Look for HSA providers online.

3. Talk to your health insurance provider.

Health Savings Account vs. Flexible Spending Account

There are a few distinctions between an HSA or a Flexible savings account, or FSA. You don’t necessarily have to choose between one or the other but here are a few differences to consider:

• Unlike flexible spending accounts, you may have to pay fees, such as maintenance fees, for your HSA.

• FSA funds don’t roll over to the next year like HSA funds do.

• HSA holders can also have a limited-purpose FSA. This can cover qualified medical expenses such as dental and vision care.

• Essentially, think of an HSA to save for your future medical expenses and using an FSA to help pay for some current.

• Be aware that you are only permitted to open a limited-purpose FSA if your employer allows it.

Final Take To GO

If you have an HDHP, you may still need to pay quite a bit before your insurance kicks in. An HSA can help you to offset the cost of healthcare expenses, making necessary medical care much more affordable.

According to the IRS, you cannot have any other health coverage — with few exceptions — to qualify for an HSA. You also cannot have Medicare coverage or be listed as a dependent on someone else’s tax return.

FAQ

Here are some quick answers to a few common questions about HSAs.

• What is an HSA and how does it work?

  • An HSA is a tax-free savings account that helps eligible individuals pay for qualified medical care. You contribute to your account through payroll deductions, making online transfers or submitting a check. To access your account, you can use an HSA debit card or a check connected to your account. You may also reimburse yourself for qualified out-of-pocket expenses using an online transfer.

• What is the downside of an HSA?

  • Here are some potential downsides to an HSA:

    • If you withdraw funds for non-qualified purposes, withdrawals are subject to a 20% tax penalty.

    • You may have to pay fees.

    • You have to opt for a high-deductible health plan to qualify.

    • Your contributions might not be enough to cover all of your medical expenses.

• Does the IRS know what you spend HSA on?

  • Though the IRS doesn't need an itemized list as to what you spend your HSA funds on the total withdrawals you make from your account you are responsible to report via Form 1099-SA when filing your tax return.

• Is an HSA a good idea?

  • An HSA can be a good idea if you like the idea of a high deductible health plan – it offers tax-free healthcare savings and potential employer contributions, and your funds roll over, so you don't lose any money if you don't use it up within the tax year.

• Can I move money out of my HSA to my bank account?

  • Yes, typically the easiest way to move money from your HSA to your bank account is through an online transfer. These transfers can be for a one-time out-of-pocket expense you can set up a recurring payment to your checking or savings account from your HSA to help cover regular bills from medical providers.

• What is the daily withdrawal limit for HSA?

  • The amount can depend on your account and what you are withdrawing the money for, however in general you can make an ATM withdrawal up to $300 each day with a HSA debit card. If you are shopping with the card you can use your cash balance in your HSA deposit account that isn't already invested in any mutual funds. You can do this up to either $10,000, or whichever amount is less.

• What happens to unused HSA funds?

  • Your HSA funds roll over to the next year so whether you or your employer contributed to the account the funds automatically carry over to the next year.

• At what age can you withdraw from HSA without penalty?

  • After the age of 65, you can make withdrawals from your HSA that are generally penalty-free. Before you turn 65, however, keep in mind that any withdrawals for non-qualified expenses aren't tax-free. If you use the funds in your account for anything that doesn't qualify, those withdrawals are subject to a 20% tax penalty.

Jessica Moore contributed to the reporting for this article.

This article has been updated with additional reporting since its original publication.

This article originally appeared on GOBankingRates.com: What’s an HSA and How To Save Money With It?