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What Is a Health Savings Account?
An HSA is a fund that certain people can set up in order to pay for their future health care expenses. To be eligible to create an HSA, you must be covered by a high-deductible health plan (HDHP). HDHPs often cost less than standard health plans, so you have the option of using the premium savings to fund an HSA tax-free.
What Is a High-Deductible Health Plan?
An HDHP doesn’t provide much in the way of coverage for routine health care expenses, such as visiting a doctor because you suspect you have the flu. Its purpose is mainly for major expenses, such as surgeries or other events that involve hospital stays or emergency transport. You’ll pay more out of pocket to cover routine costs and major expenses up to the higher deductible.
How Much Can You Contribute to an HSA?
The amount of money you can add to your HSA may change each year following inflation and will vary based on the type of plan you have and your age. The annual contribution limits for HSAs are as follows:
For 2022, contribution limits to HSAs are $3,650 for self-only coverage and $7,300 for those with family coverage.For 2023, contribution limits to HSAs are $3,850 for self-only coverage and $7,750 for those with family coverage.
HSA owners age 55 and older get to save an extra $1,000 each year. The funds you add to your HSA, so long as they are within the bounds of the yearly limits, are 100% nontaxable. When you add money to your HSA, it may come straight from your paycheck or directly from you, but either way, it results in an above-the-line tax deduction on your income tax return. You don’t even have to itemize in order to receive this tax treatment when you add funds to your HSA.
When Is the Deadline To Add Funds to an HSA?
HSA contributions can be made until the tax filing deadline each year, meaning it’s typically April 15 for the prior calendar year unless there’s a holiday and the tax filing deadline is extended. For example, you could make contributions that count for the current tax year up to the tax filing deadline of the next year. You could use this extra time to add additional funds to your HSA if you didn’t already reach the limit through payroll deductions during the calendar year. To do so, you would have to make direct contributions to your HSA account by writing a check or by setting up a direct transfer from your bank account.
How an HSA Can Assist in Your Retirement Planning
An HSA can help you reach your retirement planning goals in two major ways. First, qualified health care expenses (before or after you retire) can be paid for with the money (and any earnings) in your HSA. Second, you’ll pay no taxes on these withdrawals. In effect, you receive tax-free growth on the money you add to your HSA that you have put aside to cover health care expenses, whether or not you end up using it that way. The second major advantage of an HSA occurs if you’re lucky enough to be healthy and avoid major health care bills. Since HSA balances roll over each year, you can accumulate quite a bit of money in your account if it is not being spent. You can withdraw your HSA money for any reason after age 65, with no penalty or fees, if you build more money in the account than you need for your health care expenses after you retire. You’ll only pay basic income tax, as you would with a standard IRA distribution. If it aligns with your health care needs and expectations, think about starting an HSA or increasing your HSA funding if you’ve maxed out your contributions to your other retirement savings accounts. Consider these three factors and the outcomes they can provide for you:
Your employer can contribute to your account.You can contribute to your account via payroll deductions.You can contribute after-tax dollars.
If your employer contributes, you’re basically being paid extra and are not taxed on the amount. In other words, the contribution amounts from payroll deductions can reduce your gross income, thus lowering your tax bill for that year. If you contribute after-tax dollars, you can deduct the amount from your taxes as well. If you can get all three of these contributions (up to the annual limits), you end up with a tax-deferred savings account that your employer helps you build. Two amounts are tax-deductible in the tax year they are contributed, and you still get potential tax-free withdrawals after you reach age 65.
