If the tax bill for this year already has you looking for ways to trim what you owe Uncle Sam in 2023, you may want to consider the benefits of a health savings account (HSA).
An HSA enables you to lower your federal taxable income by setting aside pre-tax money to pay for qualified medical expenses not covered by your health plan such as deductibles, copays, and other out-of-pocket costs. Furthermore, if you don’t need to use the funds, they can become an interest-bearing nest egg that grows over time.
An estimated 63 million Americans have access to an HSA, but fewer than half have actually contributed funds during the last year — passing up several tax benefits in the process.
Rebecca Madsen, chief consumer officer at UnitedHealthcare, offers several important things to remember for taking full advantage of this type of account:
- HSAs are paired with high-deductible plans. To qualify for an HSA, you must have a health plan with a high deductible — the amount you pay for health care before insurance coverage begins for anything other than preventive care. For plan year 2022, the qualifying deductible is at least $1,400 for an individual or $2,800 for a family.
- There are annual contribution limits. HSA contributions are 100% tax-deductible up to the annual limit. For 2022, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family coverage. If you’re 55 or older, you can make an additional catch-up contribution of $1,000. (The deadline to make contributions in any tax year is the filing deadline, which is April 18 in 2022.)
- Withdrawals for health expenses are tax-free. Money from an HSA can be withdrawn tax-free when the funds are used for qualified medical expenses — before or during retirement. After you turn 65, you can spend the funds on anything without a penalty. However, if it’s not for a qualified medical expense, the funds will be taxed as income at your then-current tax rate.
- Leftover funds remain in your account. Unlike a flexible spending account (FSA), there is no end-of-the-year “use it or lose it” provision with an HSA. You own the account, and the money is yours — even if you change jobs. Your money rolls over from year to year, enabling you to build tax-free savings to pay for future medical care.
You may earn interest and be able to invest contributions. Besides the tax benefit with the initial contributions to an HSA, interest earned is not subject to taxes as long as the money is used for qualified medical expenses. Additionally, you may be able to use money in the account to invest in stocks, bonds or money-market funds. Currently, few account holders pursue this option, even though it may be one of the biggest advantages of an HSA.
For more information about HSAs, consider talking with your company’s human resources representative or visit uhc.com.
One more thing: Tax time may be a good opportunity to evaluate whether you have the necessary level of financial protection to get you and your family through an unforeseen medical issue or event. Consider adding a life, disability, critical illness, hospital indemnity or accident insurance policy. It may provide financial assistance and case management support following a covered adverse health event or diagnosis.