Managing health costs can be challenging because of all of the unknowns, especially for families. High-deductible health plans, or HDHPs, have gained popularity for their unique health savings benefits. One of the perks of these plans is the ability to open a Health Savings Account, or HSA. But what makes an HSA worth exploring?
What is an HSA?
An HSA is a tax-advantaged savings account that allows you to save and pay for qualified medical expenses that aren’t covered by your HDHP. Plus, with an HSA, your contributions, earnings and distributions put toward qualified expenses are not taxed, which can help you reduce your overall health-related costs each year.
Eligible expenses can vary by plan, so be sure to review yours, but qualified expenses may include:
Deductibles
Copays
Coinsurance
Dental
Vision care
Other health care costs like prescription drugs and over-the-counter medications
And HSAs have another benefit: They can be invested much like a 401(k) or IRA. So not only is an HSA a place to help save money on health insurance costs, it also can behave as an investment account, tracking the market over time.
Opening an HSA
As mentioned, you’ll need to be covered by an HDHP to have access to an HSA. Before enrolling in these options, consider whether they make sense for you and your family. Keep in mind, while HDHPs have higher deductibles and lower monthly premiums than traditional policies (meaning your monthly cost may be more affordable), you will have to pay more out-of-pocket before insurance kicks in.
If you’ve invested your HSA funds over time, this money can be a great way to boost your finances in retirement.
If you expect to have a lot of health-related costs throughout the year, a high-deductible plan may end up costing you more than other options. However, access to an HSA is a great choice if you’d like the opportunity to save up for unforeseen medical emergenciesor invest money for health care costs later in life.
You may be able to enroll in an HDHP through your employer if they provide health insurance benefits. You can also find HDHPs within the HealthCare.gov marketplace, which allows you to filter by those eligible for an HSA. HSAs are often paired with HDHPs, but depending on your plan, you might have to open one separately at a financial institution that offers them.
HSA contribution limits
Like a tax-advantaged retirementaccount, the IRS sets annual contribution limits for HSAs. For 2024, the limit for individual coverage under an HDHP is $4,150. For families, the 2024 maximum contribution is $8,300. Ally Bank Savings Account bucketscan help you hold onto any additional money you’d like saved for health expenses.
Not only do the funds in your HSA provide an extra cushion for regular or emergency health-related expenses, but increasing your HSA contributions can also lower your overall tax bill by reducing your taxable income. Plus, any funds left in your account at the end of the year will roll over to the next. That means you can use the money later on, even if you’re no longer enrolled in an HDHP.
Invest your funds
You don’t have to use your HSA for investing, but it’s one alternative for what to do with your unused contributions. Depending on the account, you may be able to direct your own investments or use tools that automatically manage your investments. The best part is that because HSAs are triple tax-advantaged, any earnings you make will grow tax-free and can be withdrawn tax-free (if put toward qualified expenses).
Reimburse yourself during retirement
If you’re aiming to retire early, the funds in your HSA can help hold you over until you hit 65, the age minimum for Medicare coverage. Once you turn 65, you can start using your remaining HSA money toward anything, not just medical expenses — with the caveat that you will need to pay state and federal taxes on those distributions. If you’ve invested your HSA funds over time, this money can be a great way to boost your finances in retirement.
Save smart with an HSA
When it comes to health insurance, you have many options to choose from. If you have a high-deductible health plan, utilizing an HSA can provide you some great long-term benefits for your health — and your finances.
