A Health Savings Account allows you to save pre-tax money to pay for qualified medical expenses. You can also invest the money while it is sitting in your account. More importantly, you can use the cash at any time as long as it is for qualified medical expenses.
Who can contribute to an HSA account?
Without a doubt, this is a powerful account because of the triple tax advantage. Yes! You don’t pay taxes on the contributions, growth, and withdrawals if used for eligible expenses. But wait, there are even more benefits. You can invest the money in the account, and the growth is tax-free. Also, You can roll over your HSA balance from year to year, so you don’t have to worry about using all your balance or losing it.
This sounds great, but there are some things we have to discuss because not everybody can contribute to an HSA account. You can only contribute to an HSA account with a High Deductible Health Plan (HDHP). This is determined by the IRS yearly. For 2022, the minimum annual deductible for Self-only coverage is $1,400, and $2,800 for family coverage.
How a Health Savings Account works
You can contribute to the HSA account the amount you want as long as it does not exceed the yearly limit. The contribution limit for 2022 is $3,650 for self-only coverage and $7,300 for a family.
One of the reasons this account is attractive to people is that HSA accounts allow you to make tax-free contributions. You can set up your contribution straight from your paycheck using a pre-tax payroll deduction. If you’re self-employed or your employer doesn’t offer an HSA, you can make deposits into your HSA and then claim them as tax deductions when you file your income taxes. Tax deductions don’t apply to California and New Jersey residents because these states don’t offer deductions for HSA contributions.
You can roll over your HSA balance from year to year, so you don’t have to worry about using all your balance or losing it. When you turn 65 years old and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for out-of-pocket medical expenses. Also, at age 65 and over, you can withdraw your funds for any reason without penalty. However, if you use the money for a non-qualifying medical expense, the withdrawn funds will be treated as taxable income.
Because you don’t have to pay taxes on the money you contribute to the HSA account, many people with high-income use this account to reduce their taxable income. For instance, if a person has a gross income of $60,000 and contributes $3,600. The person will only pay taxes on $56,400.
Here is a recap
- You need a High Deductible Health Plan to contribute to an HSA.
- The contribution limit for 2022 is $3,650 for an individual and $7,300 for a family.
- HSA accounts allow you to make tax-free contributions.
- If you invest the money in the HSA account, the growth of the contribution is tax-free.
- Tax-free withdrawals for qualified medical expenses.
- You can invest the fund in the account in mutual funds, stocks, and other investment tools.
