Finance Basics: What's the deal with HSAs?

For the past week, I’ve typed “HSA” dozens of times. And each time, the computer autocorrects it to “HAS.” In fact, every time you see “HSA” in this article, assume that I had to type it out twice.

It’s not too annoying, though, because each time it reminds me that my family HAS an HSA.

Why am I so thrilled to have an HSA?

Because it is one of the most powerful tax shelters available to people.

Photo by Sammy Williams on Unsplash

First, what is an HSA?

HSA stands for “Health Savings Account.” It’s like a bank account that is only available to US citizens who have a High Deductible Health Plan (HDHP).

These High Deductible Health Plans can be bought either through an employer, or through a private health insurance provider. These health plans have one very important characteristic, right in their name: high deductibles.

As a refresher, a deductible on an insurance policy is the amount that you pay out of pocket before the insurance benefits kick in. Now, because of this, an HDHP might not be the best choice for you.

Once you have an HDHP you’ll be able to start and contribute to an HSA. The purpose of an HSA is to pay for medical expenses, including your high deductible, and all in a very tax friendly way.

What are the tax benefits?

You get three flavors of tax advantages:

  • Money you contribute to the HSA is pre-tax, which means you can deduct it from your taxable income. For 2021, the limits are: $3,600 for individual plans, and $7,200 for family plans.
  • Money grows tax free within the account. These accounts can become incredibly powerful because some custodians let you buy investments with your account. Over a long period of time, that money can grow, and grow, and grow, and you don’t have to worry about paying capital gains taxes on your trades.
  • You can use the money tax free if it’s for qualified medical expenses. There’s a pretty broad definition for what constitutes a qualified medical expense. This might include doctor visits, prescriptions, or long-term care.

You read that correctly: You can put money in tax free, and withdraw it tax free.

Normally, in order to deduct medical expenses from your taxes, you have to spend more than 7.5% of your annual income. But with an HSA, you don’t even need to spend the money to get the tax advantage!

How amazing is that!

So what should you do?

The Insurance Question is an incredibly important one. HSAs offer strategies that could reap benefits years down the line into retirement, but they must be weighed against more immediate concerns about your family.

If you’re having trouble with insurance, click here to sign up for a FREE Bronze Account. A licensed financial advisor will reach out to schedule a complimentary strategy meeting so you can make sure you’re insurance is going the distance.

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