how does a health savings account (hsa) help people save money?
What is an HSA?
Money in your HSA can earn interest
In many cases, you can invest a portion of your HSA balance if you maintain a $1,000 balance in your account. The money you invest (in mutual funds or stocks, for example) continues to grow tax-free. These are some of the reasons many people use their HSA to save for retirem
This is general information about how plan benefits work. Review the Summary of Benefits and Coverage and your specific health plan benefit booklet for information about how your plan works.
It’s up to you to always check if your provider is in your health plan network before you receive services. Not all providers are in every network. You may pay more or for all of your healthcare costs if your provider is out of your network or does not have a contract with Blue Cross (this is called a non-participating provider). You can verify if your provider is in your network by calling customer service at the number on the back of your member ID card.
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How much can I contribute annually?
When making HSA contributions, keep in mind these limits. You may contribute funds for the current tax year up until your federal tax return filing deadline (without extensions). You can put money into an HSA every year that you are eligible, until you enroll in Medicare. After that, you’re no longer allowed to contribute, but you may still use your HSA balance to cover qualified medical expenses with tax-free distributions. Special rules apply to reduce the annual limits in a year you become eligible or cease to be eligible.
What expenses can I cover with my HSA?
A wide range of routine medical costs, including:
- Qualified out-of-pocket medical expenses you incur before you’ve met your HDHP deductible
- Medical, dental or vision coinsurance and copayments
- Prescription drugs and over-the-counter medications
What are my investment choices?
It varies. Some HSAs function as savings accounts only, while others allow you to invest your contributions in a selection of mutual funds or other investment choices, giving your account the potential to grow. If you’re thinking about making that sort of investment, consider your goals. Do you plan to use the account to pay for everyday health expenses in the short term rather than saving it for future anticipated medical costs? If so, then you may want to keep those funds in cash or investments that offer easy access to cash.
Can I use my HSA in retirement?
Yes. Starting an account now while you’re in good health could help you in retirement — when your medical bills are likely to increase. For individuals who are Medicare-eligible (generally age 65 or older), your HSA can be used to pay for premiums for Medicare with tax-free withdrawals, as with other qualified medical expenses, although withdrawals to pay for Medicare supplemental policies are generally not tax-free. You can even pay for non-qualified expenses, but you will need to pay regular income taxes on those withdrawals — the 20% federal tax penalty will not apply if you are at least age 65. In addition, notes Goldsmith, “You can also use an HSA to pay with pre-tax dollars for your qualified long-term care insurance premiums.”
Are there instances in which an HSA is not necessarily the best choice?
An HSA may not be right for everybody. You might prefer to select a health insurance plan with a lower deductible, in which case you wouldn’t be eligible to contribute to an HSA. Or you might, for instance, have other savings priorities — like building a general emergency fund — that leave little room in your budget for funding yet another savings account. Or if you’re young and in good health, you might decide you’d rather devote any spare cash to investing in an IRA or other account dedicated solely to retirement. But, if your employer offers any HSA contributions, you should try to get those funds if possible.
But for many others, an HSA can be a useful solution for addressing some of the high costs of healthcare. “In today’s healthcare market, we all need to take a long-term view of health coverage,” Goldsmith says. “If you consider the cost of insurance in combination with the potential savings provided by an HSA, you may be better positioned to meet your medica
1 Any interest or earnings on the assets in the HSA are tax-free while held in the account. You can receive tax-free distributions from your HSA, including distributions of interest or earnings, to either pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and, if withdrawn before age 65, death or disability, may be subject to an additional 20% federal tax. You may be able to claim a tax deduction for contributions you, or someone other than your employer, makes to your HSA. We recommend you contact qualified tax or legal counsel before establishing an HSA.
Merrill, its affiliates and financial advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
This material should be regarded as educational information on healthcare considerations and is not intended to provide specific healthcare advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.
Please consult with your own attorney or tax advisor to understand the tax and legal consequences of establishing and maintaining an HSA plan account and how it could impact your particular situation.
While you can use your HSA to pay or be reimbursed for qualified medical expenses, if you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% federal tax. Contributions made by your employer or contributions that you make on a pre-tax basis through an employer plan are subject to certain non-discrimination requirements that may limit contributions for highly compensated employees and/or key employees. Bank of America recommends you contact qualified tax or legal counsel before establishing an HSA.
Participants can receive federal income tax-free distributions from their HSA to pay or be reimbursed for qualified medical expenses they, their spouses or dependents incur after they establish the HSA. If they receive distributions for other reasons, the amount they withdraw will be subject to federal income tax and may be subject to an additional 20% federal tax. Any interest or earnings on the assets in the account are federal income tax-free. Amounts contributed directly to an HSA by an employer are generally not included in taxable income. Also, if participants or someone else make after-tax contributions to their HSA the contribution may be tax deductible. Contributions made by your employer or contributions that you make on a pre-tax basis through an employer are subject to certain non-discrimination requirements that may limit contributions for highly compensated employees and/or key employees. Bank of America recommends employees contact qualified tax or legal counsel before establishing an HSA.
You can take tax-free distributions for qualified medical expenses for you, your spouse and any dependents at any time, including after age 65. The Internal Revenue Service publishes a list of qualified medical expenses in Publication 502, Medical and Dental Expenses available at irs.gov. If you use distributions before age 65 for non-qualified medical expenses, those withdrawals generally are subject to ordinary income tax plus an additional 20 percent federal tax (although the additional 20 percent tax will not apply under certain circumstances). At age 65 and thereafter, you can withdraw funds that are not for qualified medical expenses without paying the additional 20 percent federal tax. However, you’ll still pay ordinary income tax on withdrawals used for non-qualified medical expenses. If you die and your spouse is your HSA beneficiary, your HSA balance can be transferred to your spouse without taxes due. Distributions from the HSA will continue to be subject to income tax to the extent they are not used for qualified medical expenses. If your HSA assets transfer to a beneficiary other than a spouse the account will cease to be an HSA on the date of death, and the beneficiary must report the fair market value of the HSA assets received in his or her gross income. However, the beneficiary generally can reduce their income from the assets by any qualified medical expenses of the decedent paid by the beneficiary within one year of the date of death. If no beneficiary is named or still living, HSA assets transfer according to the terms of the HSA trust or custodial account agreement, which may result in transfer to your estate