While approximately 22 million Americans are taking advantage of having a health savings account (HSA), that leaves millions more without. One reason may be that they may not qualify to have one and another is they qualify and do not know about health savings accounts. Owning an HSA allows one to avoid taxes three ways: on money going in, on money going out, and growing your account tax-free.
To qualify to open an HSA, one must have a high-deductible health insurance plan. HSA qualified health insurance plans are available through most health insurance companies, including those available on the government’s healthcare.gov marketplace. The “Obamacare” marketplace enrollment will be open from November 1 – December 15, 2020.
So, what are the advantages to having an HSA? Foremost, you can deduct up to $1,400 on this year’s income ($2,800 filing jointly), though every individual can contribute up to $3,550 in their HSA. If you are 55 or older, IRS rules allow you to contribute $4,550. You can contribute up to 65 years old until you enroll in Medicare, though you can use those funds that have grown tax free over the years without being taxed on what you take out.
One purpose is to pay for medical related expenses via your HSA debit card. Medical related expenses that qualify include co-pays, premiums, and nearly any medical expense you can think of including over-the-counter medication.
But the actual power of an HSA comes into play as a growth vehicle for your retirement when you allow your HSA contributions to grow in your account.
One of the most attractive features of an HSA are the tax-free contributions. You can add to your HSA straight from your paycheck by using a pretax payroll deduction. You never touch the money and it drops right into your HSA. Or, say you’re self-employed or your employer doesn’t offer an HSA, you can make deposits into your HSA and then claim them as tax deductions come tax time. You can’t do that with a regular savings account. – Dave Ramsey
While when you first start out with your HSA, it may only allow you to keep it in a simple savings account; however, once you reach around $1,000 in your account, you can start investing that money — tax free. Different banking and brokerage institutions have different levels before you can invest. You will also want to monitor the fees being charged on HSA. Some can be steep until you reach a certain level of savings and once you reach that level, many institutions charge very little to no fees. Here is a list of institutions that charge no fees, low fees, and hefty fees.