Learn more details about the tax implications, deductibles, and contribution limits of HSAs.
How To Open an HSA
First, you have to have a qualifying health insurance plan. A qualifying health insurance plan is one that carries a high deductible. If you think you have a high-deductible health insurance plan (HDHP), then you can contact your employer, health insurance company, or a number of privately insured banks and credit unions locally or online to find out about setting up an HSA. A high-deductible health plan may sound scary, but the limits for a health plan to qualify as a “high deductible plan” are not so bad considering the savings on premium payments and the tax advantages. For example, to qualify for a high-deductible health plan in 2022, the minimum deductible is $1,400 for individual coverage or $2,800 for a family plan. This will increase to $1,500 and $3,000 in 2023. Each plan will be different, so ask about your options.
Current HSA Contribution Limits
The IRS adjusts the limits each year for inflation. The HSA limits are:
A single person can contribute up to $3,850 per year in 2023, up from $3,650 in 2022A family can contribute up to $7,750 per year in 2023, up from $7,300 in 2022
Tax Implications of HSAs
The money that goes into your HSA account is tax-free once your employer sets up paycheck deductions for you. If you are not having your employer take payroll deductions for your HSA contributions, you will be able to take a tax deduction for the money you contributed when you prepare your federal income taxes.
What Expenses Are Covered by an HSA?
Qualifying Expenses
There are many things that you can use your money for, but they may vary by plan, so when you get an HSA plan, you will need to ask for a list of covered expenses. Here are some examples of common HSA-qualifying expenses:
Prescription medicines and eyeglassesOffice visit co-paysChiropractorsDentistsOrthodontistsOver-the-counter meds such as aspirin and antacidsBirth control (over-the-counter or prescription)Laser eye surgery
Investments
The funds within your health savings account can be invested in a way that is similar to a 401K. By investing in your HSA, you can take advantage of tax-free growth and also embrace powerful tax advantages you can’t find through other traditional investment or savings vehicles. An HSA offers flexibility in that you can make pre-tax contributions, grow tax-free earnings, and enjoy tax-free distributions for qualified medical expenses. In most cases, investing in an HSA can provide the potential for long-term growth and significant tax savings. However, investing in both a 401(k) and an HSA can be an extremely effective retirement planning strategy.
Health Insurance Premiums
You can use your HSA money to pay for your health insurance premiums while you are collecting federal or state unemployment benefits. You can also use your HSA money to pay for COBRA premiums, qualified long-term care insurance, and, if you are age 65 or older, Medicare and other health coverage (excluding Medigap).
International Medical Care
Your HSA money can be used for the same medical expenses anywhere and in another country. This is an added benefit of HSAs, as regular health plans may not cover medical care in a different country.
