Benefits of Health Savings Accounts

A Closer Look at the Advantages to Setting up an HSA

A health savings account (HSA) is a personal savings account that can only be used for qualified healthcare expenses.  Eligibility for an account depends on enrollment in a high-deductible health plan (HDHP).   Let’s take a closer look at both of these health plans because in order to understand the advantages of an HSA, you must understand the value of a HDHP.

What is an HDHP and an HSA?

An HDHP health plan offers a larger deductible for medical expenses than a typical health insurance plan in exchange for a lower premium.  These plans also have a maximum that limits the amount you spend on out-of-pocket medical expenses, not including premiums.  If you are enrolled in an HDHP, you receive a lower insurance premium, and it is the only way to qualify for an HSA.

The HSA gives owners of the account a tax advantage and it allows you to pay for qualified medical expenses that the HDHP doesn’t cover.  These accounts are owned and funded by the employee, and employers can contribute to it.  HSA’s can be set up at banks and credit unions.

How do HSA’s work?

The owner of the HSA account determines how much pretax income to contribute from each paycheck.  If you are not contributing through your employer, you can contribute funds directly to your HSA and write them off as tax deductions.  Annual limits are set by the IRS.  Then when you withdraw money from the HSA to pay for qualified medical expenses, you take the money out tax free. The funds in the HSA can remain as cash savings or the funds can be invested.  Most HSA’s have a minimum cash requirement before allowing money to be invested.  The interest your money earns is tax free.  The contributions made to the account can be made until age 65 and are eligible for Medicare.

Once the money is in your account, you can access your funds through a debit card or checks that are directly linked to your HSA.  Qualified medical expenses can be paid for such as medical supplies, prescriptions, eyeglasses, and dental fillings.  The money that is still in your account at the end of the year will roll over to the next year.  This can help you build a long-term savings account for future medical expenses.  You can even use money from the HSA in retirement.

What are catch-up contributions?

After reaching age 55, you can contribute an additional $1,000 each year through age 65 or until you enroll in Medicare.  This is known as a catch-up contribution.  As long as you were covered by a HDHP for the entire year, you can make the full contribution the year you turn 55, regardless of the date of your birthday.

 Let’s take a closer look at the benefits of HSAs. 

  1. Tax advantages – The interest or other earnings in the account are tax deferred and the withdrawals are tax free, as long as the money is used to pay for qualified medical expenses.  Contributions are not included in your gross income and are not subject to federal income taxes.  In most states, the contributions are not subject to state taxes either.
  2. Contributions – Money remains in your account until it is used.  Employers, as well as family members,  can also contribute to the account. The IRS does set limits.  The limit for 2022 is $3,650 for individuals and $7,300 for families.  This is about a 1.4 percent increase from 2021.
  3. Retirement Savings – The funds in your HSA roll over every year, so you can save money over a long period of time.  At age 65 the HSA funds can be used for qualified medical and non-qualified expenses.  When the funds from your account are spent on non-qualified expenses, the money will be taxed, but there will not be a 20% penalty.  This is the penalty that occurs when funds are used for non-qualified expenses before the age of 65.
  4. Accessible – The funds in your HSA account can be accessed with a debit card or checks.  Funds roll over from year to year, even if you change jobs or retire.  The HSA is a bank account in your name, so you decide how and when to use the funds.  Make sure you have a quick and simple way to monitor the money in your HSA.  Most banks offer access to their account balances online, through a mobile app or by phone.
  5. Variety of Expenses Qualify – a wide range of medical, dental, and mental health services qualify for funding with your HSA.
  6. Tax-Free Earnings – Any interest or earnings on the money in the account is tax-free.  Most HSA accounts earn a minimum amount of interest, less than 0.1%
  7. An Investment – A portion of your HSA balance can be invested in mutual funds, stocks, and bonds.  There is usually a certain balance that must be maintained in your HSA to be eligible.  This feature of the HSA provides the opportunity to put money to work for your future.  It allows you to build your healthcare nest egg for retirement.

Healthcare coverage is so important.  HSA’s offer tax advantages, cover a variety of qualified medical expenses, and allow for retirement savings.  It is just like a bank account, and the money in the account will earn interest over time.  The greatest advantage of all is that the contributions in an HSA belong to the owner of the account for life.

Jarrettsville Federal Community Bank offers HSA individual accounts designed to work together with an HSA-eligible high-deductible health plan (HDHP).  We are now offering an HSA account. Let us help you work towards your financial goals, while making the most of your healthcare savings!  For more information contact us at 410-692-5151.