Health Savings Accounts (HSAs) are a type of investment account that allows you to set aside pre-tax money for healthcare expenses. HSAs are a great way to save for healthcare costs in the short-term and long-term, but there are some limitations to be aware of before opening an HSA. We’ll cover the basics of HSAs, some benefits, and limitations.
What is an HSA?
A Health Savings Account (HSA) is a type of investment account that allows you to set aside money for healthcare expenses tax-free. The money in your HSA can be used to pay for qualified medical expenses, such as doctor’s visits, prescription drugs, dental care and other qualified expenses. HSAs are available to anyone with a high-deductible health insurance plan.
There are several benefits of opening an HSA, including:
• Tax-free growth: The money in your HSA grows tax-free, which means you won’t have to pay taxes on the interest you earn or on withdrawals used to pay for qualified medical expenses.
• Tax deductions: Contributions to your HSA may be tax-deductible, which can lower your overall taxable income.
• Flexibility: You’re not required to use all of the money in your HSA each year. The money can be carried over from year to year, giving you the flexibility to save for future healthcare costs.
• Portable: HSAs are portable, which means they can stay with you even if you change jobs or health insurance plans.
• Penalty-Free Withdrawals: After the age of 65, funds in the account can be withdrawn penalty-free regardless of their use. However, you may still be subject to taxes on the amount withdrawn.
There are also some limitations to be aware of before opening an HSA, including:
• Limited investment options: Unlike other types of investment accounts, HSAs typically have limited investment options. This means you may not be able to invest in riskier investments, such as stocks and mutual funds.
• Contribution limits: The contribution limit varies annually. It also depends on if you are contributing as an individual or with family coverage. These contribution limits may be too high for some people, especially if they don’t have a lot of extra money to set aside each month.
• Penalties: Withdrawals made prior the age of 65 may be subject to penalties if they aren’t for a qualified medical expense.
Health Savings Accounts (HSAs) are a great way to save for healthcare costs in the short-term and long-term. However, there are some limitations to be aware of before opening an HSA. We’ve covered the basics of HSAs, some benefits, and limitations. Before opening an HSA, make sure you understand how they work and what restrictions apply so that you can make the most out of your account. When in doubt, contact a professional for advice!