Though you may have heard of a health savings account (HSA), if someone pressed you for a definition, would you be able to come up with one? No? Don’t worry—neither would most people. That’s one of the best things about our society—you can always find someone who is an expert. It doesn’t matter if it’s about Star Wars, pet behavior, or knitting, someone can answer your questions. Another question may be, what’s an individual HSA, and what should I know about opening an account?
An HSA is a special savings account that lets you set money aside to pay for medical, dental, and vision expenses or save and invest that money tax-free. It’s like a 401(k) for health care—a tax-advantaged account you can use today or save for later. Here’s what you need to know about Individual Health Savings Accounts (HSAs) to decide if it’s right for you!
The Inside Scoop on Individual HSAs and Triple Tax Savings
If you have the option to use a coupon to buy something at a store, or to buy the same item at full price without a coupon, would you use the coupon? Of course you would! There’s no reason you wouldn’t use it, because you’ll score significant savings on the exact same item.
The same can be said of an HSA. Why wouldn’t you use it, when you’re getting the same exact benefits…but with tax savings? Great question.
When we throw around terms like tax-advantaged, triple-tax savings, tax-free, tax deductible, and pre-tax, it sounds great, but let’s go over what it really means. It means you save on taxes three ways:
Funds that are in your HSA are not counted as part of your earnings. When you pay your income tax, you can deduct the amount you contributed to your HSA, reducing your total taxable income. That money you saved in taxes goes back in your pocket. Amazing!
You may be familiar with accounts that tax you on the funds when you remove money like a 401(k). But with HSAs, the funds you use for eligible health care expenses aren’t taxed. You are getting more for your money than you would if you used funds that had already had taxes taken out.
If you don’t need to use that money in your HSA for health care expenses, it gets to stay in your account and grow. If you choose to invest your HSA funds, those gains aren’t taxed either.
With the three ways to save on taxes, it makes sense to at least try an HSA. How many ways are there to save on taxes—legally, we mean. Discount taxes, tax coupon…none of them have quite the same ring as a tax-advantaged health savings account.
Who Can Open an Individual HSA?
To get an Individual HSA, you might think you need to meet a lot of requirements. Happily, Individual HSAs are very straightforward. It’s for everyone, whether you’re single, married, or have kids. You don’t have any income rules tied to it. The maximum amounts you can contribute each year are the same for everyone, and it’s a flat amount decided by the IRS. (For 2021, that max amount is $3,600 for individuals, or $7,200 for families. Learn more in this post.)
You do need to meet these requirements:
Must be covered by a High-Deductible Health Plan (HDHP)
Cannot be claimed as a dependent on someone else’s tax return
- Cannot have any other health coverage, including: enrollment in another health plan, Medicare, or military/veteran health benefits
It’s also never too late to open an HSA. You can do it at any age, take it with you to any job or company, and keep it after you retire. It is completely yours to do with what you want (for health care spending of course).
This account isn’t tied to any employer, and it doesn’t dictate who can put money into it. If you have a benevolent aunt who wants to contribute to your account, if your spouse kicks in some money, or it’s just you putting money in—it all works for the HSA.
Sometimes people worry that they’ll put money into their HSA, not have medical bills, forget about it, and the money will disappear. That doesn’t happen with HSAs because, like a regular savings account, the money rolls over year to year and never expires.
Plus, you’re always going to have something to spend it on because everyday health products like over-the-counter medications are HSA eligible. It’s hard to get through a year without a headache, cold, or allergies! Other ordinary items and services like sunscreen, dentist appointments, and flu shots are covered, too. These are just the few in a long list of popular eligible items—and the list is extensive.
When you’re not using HSA funds to spend, you can invest them and watch them grow. Once you’re 65, you can withdraw the money, pay income taxes on it, and use it for anything you want—or save it for those medical bills that tend to increase with age. Whatever you opt for, it’s your money to spend on something fun or something necessary or both!
Accessing Your HSA Funds
Another reason people cite being unsure about contributing funds to an HSAs is they want to be sure they can access their money without having to do a lot of work to get it. Life, as we know, is difficult enough without adding in any more chores! Thankfully, HSAs are designed to avoid that, too. Many individual HSAs offer a payment card you can use much like a debit card. When you have expenses, just use your HSA card, and the money is withdrawn from your account. In most cases, you don’t have to submit a reimbursement. It’s done!
Many HSA providers also make your information available online through a member portal and some offer a mobile app for easy access to your account details, which means it’s all on your phone. You can check your account balance, plan for unexpected expenses, ensure you’ve set aside enough for planned surgery or kid number three’s braces, and check you have enough for your everyday items.
You’re not locked into certain numbers, either, which is great to know in our unpredictable times. You can change how much you contribute into your HSA at any time, up or down, within the IRS annual contribution limits.
Building Confidence
Whatever way you refer to an Individual HSA—your health care coupon/discount, a legal agreement to save on taxes—you can be confident that it’s a smart way to pay for medical, vision, and dental expenses. Even when the future is uncertain, it’s nice to know that there are solid answers to some questions. And now, if you’ve read all the way to the end, you might just be able to define what an Individual HSA is in case anyone ever asks.
About the Author:
Carla Wardin lives in St. Johns, Michigan, where she focuses her writing on the health and technology industries.
