Despite government promises to slow the rising costs of healthcare, most people are paying significant sums when you add up bills for preventative care, health insurance premiums and annual deductibles. In fact, data from the Kaiser Family Foundation (KFF) shows the average family in the U.S. spends around $8,200 per year — or 11 percent of their income — on healthcare. Crazy enough, this figure doesn’t even include employer contributions for health insurance premiums, which can make up a substantial amount of an individual’s compensation.
Fortunately, the federal government offers a smart way to save for healthcare expenses in a tax-advantaged manner, although not every can qualify.
Of course we’re talking about Health Savings Accounts, or HSAs. These accounts can help you save money on taxes now and later on, and they can even be used to help fund your golden years if you don’t use your funds before retirement age.
Who is Eligible to Save Money with an HSA?
Your ability to save money in a Health Savings Account depends on the type of health insurance you have. Specifically, your health insurance plan needs to meet parameters as a High Deductible Health Plan, or HDHP.
For your health insurance plan to qualify as an HDHP in 2021, you need to have an individual deductible of at least $1,400, or a family deductible of at least $2,800. Meanwhile, the maximum out-of-pocket amount for your plan can only be up to $7,000 for individuals or $14,000 for families.
There are no income caps that limit who can contribute to a Health Savings Account, which makes them an even better deal for high earners.
How Much Can You Save in a Health Savings Account?
The federal government tends to increase the amount individuals and families can save in a HSA account every few years, and the most recent increase was for 2021. This year, individuals can save up to $3,600 in a HSA account, and families can save up to $7,200. These amounts are up from 2020, when individuals could save $3,550 and families could save up to $7,100.
Also keep in mind that you can save another $1,000 per year as a catch-up contribution if you’re ages 50 and older.
The Benefits of Using a Health Savings Account (HSA)
Saving for future healthcare expenses always makes sense, but why should you save money in a HSA in particular? Here are some of the important reasons you should open and utilize a HSA if you can:
#1: HSA contributions are tax-advantaged.
First and foremost, money contributed to a HSA can be deducted from your taxable income. Since families can save up to $7,200 in a HSA account in 2021, this deduction can represent a significant income tax savings over the course of a year.
Also keep in mind that, after you save on taxes the year you contribute, the money in your HSA account gets the chance to grow on a tax-free basis. This means that, if you don’t use it, you have an upfront tax benefit and the benefit of tax-free growth for years or decades to come.
#2: You won’t pay taxes on funds you withdraw for healthcare expenses.
When you set money aside in a Health Savings Account (HSA), you can let it grow and use it for eligible healthcare expenses when you’re ready. Examples of eligible healthcare expenses include doctor’s bills, prescriptions, deductibles and more.
The best part is, the money you withdraw for eligible healthcare expenses can be taken from your account tax-free.
#3: Money left in a HSA beyond the age of 65 can be withdrawn penalty-tree.
While money in a HSA account is subject to income taxes and a penalty if you withdraw it for non-medical expenses before you turn 65, this isn’t the case once you’re 65 or older. At that point, you can withdraw the money in your HSA account and use it however you want without a penalty. You will just have to pay income taxes on money you don’t use for eligible healthcare expenses.
This is part of the reason many people invest in HSAs with no plans to use their money for healthcare expenses. You get a tax benefit upfront, and your money gets to grow tax-free over time. If you don’t use it before age 65, then you can treat your HSA account as an additional retirement account.
#4: You can invest the money in your HSA so it grows over time.
The best part about HSA accounts is the fact you don’t have to stash your money away into an account that barely earns any interest. In fact, many HSA administrators let you invest your money into popular funds. This lets you gain the tax benefit for contributing upfront, and your money has the chance to grow over time when you invest it into mutual funds and other securities.
Take HealthSavings Administrators, for example, which is a popular company that offers HSAs with investment options. With HealthSavings Administrators, you can begin investing with the first dollar you save, so there are no minimum balances required to get started. Once you’re ready, you get the chance to invest your HSA money into 42 low-cost Vanguard and Dimensional funds without any investment transaction fees.
Should You Open a Health Savings Account (HSA)?
Unless you have so much money you will never have to care about the costs of healthcare or retirement, then it almost always makes sense to open and use a Health Savings Account (HSA). Putting money into an account can help you reduce your taxable income and pay less in taxes in the year you invest. Not only that, but chances are good you’ll need cash to pay for healthcare expenses in the next decade or so. So, why not plan ahead?
Just remember that you have to have a HDHP to qualify. Your employer might offer a Health Savings Account (HSA) option at your work, but you also have the right to open your own.
At the end of the day, saving money in a HSA for healthcare expenses is just plain common sense. This is true whether you think you’ll need the money now, or whether you may not need it until decades from now. When you save and plan ahead, your money will be there when you need it.