Some health insurance policies allow you to have a health savings account (HSA) to help with medical expenses. Despite the many benefits of opening an HSA, many individuals still go without it.
Below you'll find exactly what you need to know about an HSA so you can decide whether or not you'd like to open one to supplement your health insurance policy.
What is an HSA, exactly?
An HSA can be described as a 401k for healthcare expenses. Essentially you contribute pre-tax dollars into an account that is to be used for healthcare.
Who is Eligible for an HSA?
In order to qualify for an HSA you must have a high deductible health plan. "High deductible" in this case is defined as any health insurance plan that has a deductible of $1,250 or more for an individual and $2,500 or more for a family.
Why Get an HSA?
Aside from having money saved up to help cover healthcare costs, you also get a a few tax breaks.
Without an HSA your medical expenses are not tax deductible unless they exceed 7.5% of your annual gross income - which is (hopefully) unlikely for most of us. However, the money you invest in an HSA and later use for qualified healthcare expenses is tax-free.
Furthermore, according to the IRS the contributions you make to an HSA are 100% deductible even if you don't itemize your deductions on a Form 1040.
Additionally, any interest earned in an HSA is tax free and does not need to be reported to the IRS.
That's a triple tax benefit just for having an HSA!
Can I get a tax break for any medical expense?
In order to get a tax break the money in your HSA must be used for qualified medical expenses.
For example, any over the counter drugs (unless prescribed by a doctor) are not considered tax deductible. Something like insulin, on the other hand, can be deducted.
What is considers a "qualified" medical expense?
You can use your HSA account for just about any medical expense including prescription medication, surgeries, ER visits, doctor's appointments, dental costs, mental health and birth control.
Those items that are not considered qualified expenses include over the counter medications, health expenses accrued outside of the U.S. and non-medically necessary procedures like elective cosmetic surgery.
How Do I Get the Money From My HSA?
Upon opening your account and making a contribution you will receive a debit card and checks linked to your HSA. These can be used to be cover qualified healthcare expenses.
How Much Can I Contribute to an HSA?
Just like a 401k or an IRA, there are limits to what you can contribute annually to an HSA.
As of 2014 and individual can contribute up to $3,300 to their HSA whereas a family can contribute up to $6,550. HSA holders who are over age 55 get an extra $1,000.
If you exceed these limits you are subject to a 6% tax penalty.
Overall an HSA is a good idea to help cover medical costs. The tax breaks alone make it something worth looking into.