HSA

What is an HSA?

An HSA is a savings account specifically designed for medical expenses. It's only available to individuals who have a high-deductible health plan (HDHP). The money you contribute to this account is not taxed, and you can use it to pay for qualified medical expenses, such as doctor visits, prescription medications, and certain types of medical equipment.

Advantages of an HSA

  • Triple Tax Benefits:
    • Tax-Deductible Contributions: The money you contribute to your HSA is tax-deductible, which means it can reduce your taxable income.
    • Tax-Free Earnings: The interest and investment earnings on the money in your HSA grow tax-free.
    • Tax-Free Withdrawals: As long as you use the funds for qualified medical expenses, withdrawals are tax-free.
  • Portability: The HSA belongs to you, not your employer. This means you can keep it even if you change jobs or retire.
  • Flexibility in Spending: There is no requirement to spend the funds within a particular year; the money rolls over year after year.
  • Investment Opportunities: Once your HSA balance reaches a certain threshold, you may have the option to invest the funds in stocks, bonds, and mutual funds, potentially increasing your savings.
  • Long-Term Savings: HSAs can also be used as a retirement savings tool since you can withdraw funds for any purpose without penalty after the age of 65 (though you will pay income tax on non-medical withdrawals).

Disadvantages of an HSA

  • High-Deductible Requirement: You must be enrolled in a high-deductible health plan to qualify for an HSA, which means you might have higher out-of-pocket costs before your insurance kicks in.
  • Contribution Limits: There are annual contribution limits set by the IRS, which may restrict how much you can save. For 2025, the limits are $4,150 for individuals and $8,300 for families (plus an additional $1,000 catch-up contribution if you're 55 or older).
  • Penalties for Non-Qualified Expenses: If you withdraw money for non-medical expenses before age 65, you'll owe income tax on the withdrawal and a 20% penalty.
  • Investment Risk: If you choose to invest your HSA funds, there's a risk of losing money, just as with any other investment.
  • Record Keeping: You'll need to keep receipts and records to prove that your HSA withdrawals are for qualified medical expenses, especially if the IRS audits you.