Why You Should Consider a Health Savings Account

by Lauren Beichner

Marketing Specialist


Medical costs can be overwhelmingly expensive, even with comprehensive health insurance. Saving in advance with a health savings account not only makes it easier to pay for your needs, but it also lowers your taxable income. Here’s what you need to know about these beneficial accounts.

Health savings accounts explained

Health savings accounts, or HSAs, hold funds destined to be spent only on qualified medical expenses. You contribute money before it’s taxed, which lowers your amount of taxable income, meaning you’ll likely owe less in taxes. Additionally, as long as you spend the money on qualified medical goods or services, you won’t have to pay tax when you withdraw it, either.

Health spending accounts are similar to flexible spending accounts, or FSAs, but there are some key differences. FSAs are only available to people with employer-based health plans. HSAs are not tied to jobs; in fact, you may be able to get one directly through your health insurer. You can also open an HSA through a financial institution such as Coastal Credit Union.

Another key difference: Unlike FSAs, the money in HSAs rolls over at the end of the year. If you don’t spend all of your savings in one year, you don’t lose it. You can even invest your unused HSA money in stocks, mutual funds or other investments.

When you open a health savings account, you will typically receive a debit card for purchases.

Qualifications and restrictions

HSAs offer major tax advantages, but not everyone can qualify. To be eligible, you must have a high-deductible health insurance plan as defined by the IRS. The threshold number changes slightly every year; for 2021, you have to have a deductible of at least $1,400 as an individual, or twice that as a family, to qualify. You aren’t eligible if you’re enrolled in Medicare or if you can be claimed as someone’s dependent on tax forms.

Additionally, there is a maximum amount you can contribute annually, which is also dictated by the government and may change each year. For 2021, that limit was set at $3,600 for an individual and $7,200 for a family. However, if you're 55 or older, you can contribute an additional $1,000 every year to your HSA. 

You also can only receive tax-free benefits if you use the HSA money for qualified expenses. Your HSA provider will give you an extensive list of what’s allowed, but it usually includes doctor appointments, prescriptions, medical devices, home health care and lab work, among other common medical expenses. Commonly excluded purchases are funeral expenses, cosmetic surgery, diaper service, and vitamins. Note that HSAs usually cannot be used to pay insurance premiums. 

What happens if you use your health savings account money on unauthorized purchases? You have to pay income tax on that amount, and those under 65 also must pay a 20% penalty.

Health savings accounts offer significant tax benefits and the ability to save in advance for medical needs, but make sure you qualify and stick to the rules if you want to enjoy the perks.

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