The Health Savings Account (or HSA) is arguably the greatest savings vehicle out there. In this post, I’ll talk about exactly what an HSA is, how it works, and how you can take advantage of the benefits it offers. I’ll also talk about what it’s not. #anHSAisnotanFSA
What is a HSA?
A Health Savings Account, on the surface, is pretty much exactly what it sounds like. It’s a personal account that you own, not through an employer, where you can save money to be used for qualifying healthcare expenses. Simple enough, right? Yes, that part is simple, but it gets so much better.
How Does It Work?
When you have an HSA, as a single person, you can contribute up to $3550 pre-tax (for the year 2020) to the account. Couples can contribute up to $7100 (again, for the year 2020). Whenever you have a medical expense, you can reimburse yourself for the expense out of your HSA account…you just need to keep the receipt. And there’s no expiration date on the reimbursements so it’s accessible whenever you want. In fact, most HSA’s will give you a debit card that you can use so you don’t even have to go through the reimbursement process. However, there’s a pro tip I’ll provide a little later that might make you appreciate the receipt/reimbursement process.
Ok, so whoop-dee-doo. It’s a savings account that reimburses me my own money. What’s so great about that? What’s great about it is that it’s the tax advantaged trifecta! When you contribute money to your HSA, those funds are considered pre-tax so you don’t pay taxes on the money you put into it. When you withdraw the money (i.e. get reimbursed or use the debit card), you don’t pay taxes on that either! If you’re counting, and you always should be, that’s only two and a trifecta has 3 elements. The third element is the tax free growth. Whoa, whoa, whoa…growth? TMWG, you didn’t say anything about growth. Yes, once your HSA balance reaches a certain threshold, you can invest any money in the account above that threshold balance into mutual funds, just like you can with your 401(k). The threshold will vary depending on who you have your HSA through, but $1,000 seems to be a popular threshold.
I want to point out quickly that an HSA is different from an FSA (Flexible Spending Account). A major difference is that an FSA is “use it or lose it”, meaning you have to use the funds in the year that you contribute or you forfeit them. I’ve actually made this mistake. It sucked to the tune of about $3,700…and the IRS had no empathy. If you have an HSA, you can’t contribute to a traditional FSA, but you can still contribute to both an HSA and certain types of FSA’s, like a Dependent Care FSA or a limited purpose FSA that can be used for dental or vision expenses.
Pro Tips
If your employer doesn’t offer an HSA and you meet the eligibility requirements, you can open your own HSA through any number of providers. A popular one that many people use is through Fidelity. Another one I’ve personally used is Avidia Health. I recommend these because they offer low/no fees and flexible investment options, but I encourage you to do your own research to find what works for you.
Hopefully this helps clear things up around HSA’s. I’d love to hear your thoughts. Leave a comment.
