"Health Savings Account" Additionally, just like in a 401(k) plan or other retirement account, you can invest the funds once your HSA savings levels reach a specific level.
What Are HSA Triple Tax Savings?
You are aware of the proverbial adage "death, taxes, and certainties." What if taxes weren't a given, though? What if you could completely avoid them, at least financially? You can use a health savings account to protect a portion of your income from taxes. In fact, "triple tax savings" is how HSA proponents refer to it. This is how:
What Is a Health Savings Account?
- Pretax contributions lower your taxable income for the current tax year because they are made.
- There are no taxes on interest, dividends, or capital gains as your money accumulates over time.
- You are not required to pay taxes on any money you withdraw as long as it is used for legitimate medical costs.
You don't have to worry about paying taxes on that money The money can continue to grow indefinitely.
What Are the HSA Rules for Eligibility?
In order to open a health savings account, you must fulfill certain requirements. Here are the eligibility requirements for HSAs:
- A high-deductible health plan is required. Many plans specify whether they have a high deductible and are HSA-eligible.
- You lack other health insurance.
- You are not a Medicare beneficiary.
- No one has claimed you as a dependent on their tax return.
What Is a Health Savings Account?
A word about HDHPs: Monthly premiums for high-deductible health plans are typically lower than those for comparable preferred-provider organizations. Contrary to what the name may imply, you will first incur higher out-of-pocket expenses (up to the deductible) before the HDHP starts to cover costs. However, if you put in enough effort, you can fund your HSA with the monthly premium savings.
What are the HSA contribution limits for 2023?
Whether you're an individual or a family will affect your HSA contribution limits. Every year, the IRS adjusts the contribution cap to account for inflation. The contribution ceilings for 2023 are:
- Self-only coverage for an individual: $3,850
- $7,750 for an individual with family coverage
If you are over 55 and not enrolled in Medicare, you can contribute an additional $1,000. If both you and your spouse are over 55 and don't have Medicare, and you both have a HDHP family plan, that amounts to a $2,000 annual bonus contribution.
What Is a Health Savings Account?
Remember that you have until the tax deadline of the following year to make contributions from the prior year. So, until April 15, 2023, you can make contributions to your HSA for 2022. You have until April 15, 2024, to make contributions for the 2023 tax year. Make sure to specify whether the donation is from the prior year or the current year.
What Are the HSA Tax Rules for Withdrawals?
Generally speaking, you don't pay taxes on your HSA withdrawals as long as you use the funds for eligible medical costs. Before making your first withdrawal, there is no requirement that you wait a specific amount of time.
Long Term Savings and Retirement and How Can I Use an HSA
Some people include a health savings account in their long-term financial and retirement planning because HSA tax savings offer a triple benefit. There are several possible tactics, as follows:
- Use only what you need immediately. Only consider using HSA funds for urgent and necessary out-of-pocket medical expenses. The remaining contributions you make can be invested to earn compound returns over time.
- save for future medical procedures. You can use your HSA to build up funds for upcoming procedures and unexpected medical expenses. Out-of-pocket expenses can still be disastrous in some circumstances. An HSA can act as a medical emergency fund to assist in defraying those expenses without going over your spending limit.
- HSA as a health care account in retirement The majority of your contributions can be invested, allowing you to create a long-term portfolio for retirement. The HSA can then be used to pay for medical expenses (including Medicare premiums). You can use IRAs and 401(k)s, as well as other retirement accounts, to pay for regular expenses.
- Reimburse all your health care costs at once. Self-reimbursement for prior qualified out-of-pocket expenses is possible. Some people pay for their medical expenses today with after-tax dollars and save their receipts (either physically or digitally) over time. They later reimbursed themselves from the HSA for all those expenses at once during retirement, providing a sum of tax-free money for that time period.
- Backup IRA. Additionally, an HSA can be used as a tax-advantaged retirement account. You can treat unqualified expenses as if they are IRA distributions if you wait until you are 65 before taking a distribution from invested funds. Although you will have to pay federal (and frequently state) taxes, you won't be hit with the 20% tax penalty.