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A Health Savings Account or “HSA” is a tax-advantaged savings vehicle that can be used to pay qualified health-related expenses with pre-tax dollars. For calendar year 2020, individuals can contribute as much as $3,550 to an HSA, families can contribute $7,100—and there’s even a $1,000 “catch-up” provision for individuals 55 and over.
Health savings accounts are available to individuals and families who are enrolled in high-deductible health plans (HDHPs). True to their name, high-deductible plans come with higher out-of-pocket expenses than other insurance offerings. HDHPs set a maximum limit on the amount a covered person could need to pay for care during a plan year.
With out-of-pocket maximums set at $6,900 for self-coverage HDHPs in 2020, there’s no doubting that consumers need all the help they can get in accumulating savings to cover planned and unplanned expenses. HSAs offer three tax benefits:
Contributions are tax deductible: Like a 401(k), you contribute pre-tax dollars, which reduces taxable income.
Earnings grow tax-free: Investment earnings on HSA contributions are not taxed.
Withdraws are tax-free so long as they’re used to cover qualified medical expenses. You can find a list of qualified expenses on the IRS’s website.
Unlike a Flexible Spending Account (FSA), participants can open an HSA at any time during the year, change contribution rates or even invest a single lump sum.
Money contributed to an HSA has no expenditure time limit. Funds not used during the contribution year can build over time, and contributions can be added from different income sources. This makes the HSA particularly valuable as a secondary retirement savings vehicle.
How do HSAs benefit employers? By offering a tax-advantaged HSA plan, a business provides its employees with a convenient way to accumulate pre-tax medical savings, and the employer can make its own contributions to these accounts as part of an overall benefit plan.
Still not convinced? Here’s one more benefit: Once you turn 65, money can be withdrawn from an HSA for reasons other than health care, though such distributions will likely be taxable.
For more information or to open a Health Savings Account, stop by our office located at 10690 Medlock Bridge Road, or visit www.AmericanCommerceBank.com.