What expenses can I use my HSA for?

What expenses can I use my HSA for? In this episode of Ask The Hammer, Jeffrey Levine from Buckingham Strategic Wealth, aka the Hammer, discusses which expenses you can use your HSA (healthcare savings account) for.

A Health Savings Account (HSA) is a tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP). HSAs are designed to help individuals save and pay for qualified medical expenses while offering tax benefits.

Here are some key features of HSAs:

1. Tax Advantages: Contributions to an HSA are tax-deductible, meaning that they can be made with pre-tax dollars, reducing the individual’s taxable income for the year. Additionally, any interest or investment earnings on HSA funds grow tax-free, and withdrawals used for qualified medical expenses are also tax-free.
2. Ownership and Portability: HSAs are owned by the individual, not the employer, and the funds in the account belong to the individual, even if they change jobs or health insurance plans. This portability allows individuals to take their HSA funds with them and continue using them for qualified medical expenses.
3. Contribution Limits: Each year, the IRS sets limits on the maximum amount individuals can contribute to an HSA. For 2022, the contribution limit is $3,650 for individuals with self-only coverage and $7,300 for individuals with family coverage. Individuals age 55 and older can make an additional catch-up contribution of $1,000 per year.
4. Use for Qualified Medical Expenses: HSA funds can be used to pay for a wide range of qualified medical expenses, including deductibles, copayments, coinsurance, prescription medications, and certain medical services not covered by insurance. A list of qualified medical expenses is provided by the IRS in Publication 502.
5. Rolling Over Funds: Unlike flexible spending accounts (FSAs), where funds are typically “use it or lose it” at the end of the plan year, HSA funds roll over from year to year and continue to grow tax-free. There is no deadline to use HSA funds, allowing individuals to build a substantial balance over time.
6. Investment Options: Some HSA providers offer the option to invest HSA funds in a range of investment options, such as mutual funds, stocks, or bonds. This allows individuals to potentially grow their HSA funds over the long term and use them for future medical expenses or retirement healthcare costs.
7. Triple Tax Benefits: HSAs offer triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. This makes HSAs one of the most tax-efficient savings vehicles available.

It’s important to note that HSA funds must be used for qualified medical expenses to receive tax benefits. Withdrawals for non-qualified expenses before age 65 are subject to income tax and may incur a 20% penalty. However, after age 65, HSA withdrawals can be used for non-qualified expenses without penalty, although they are subject to income tax.

Overall, HSAs can be valuable tools for individuals to save for medical expenses, reduce their taxable income, and build a financial cushion for future healthcare costs. It’s essential to understand the rules and regulations governing HSAs and to consult with a financial advisor or tax professional to maximize the benefits of these accounts. Watch more episodes of Ask The Hammer at this link: https://www.finstream.tv/videos/ask-the-hammer/