A health savings account (HSA) can be a useful part of your financial toolbox. Like retirement accounts, HSAs come along with powerful benefits like tax-free spending on healthcare, but they also have some odd rules. Knowing the ins and outs of your HSA will help you get the greatest benefit from it depending on your own financial situation.
Here are five things to know about HSAs:
You can invest funds in your HSA
This is where the power of an HSA is in the long run. As you accumulate money in your HSA, you can actually invest those funds so they can grow for you over the years. As long as you spend that money on qualified health expenses, you never pay taxes on your contributions or your investment gains. Some HSA providers require you to maintain a minimum cash balance (typically between $1,000-$2,000).
You can choose where to set up your HSA
Even if your employer offers you the ability to contribute to an HSA, you can still choose to set up an HSA with your own preferred provider. There are a few reasons you might choose to do this including dissatisfaction with the fees or investment options in your current HSA. If you do decide to go your own way, you may still be able to make pre-tax contributions through payroll deductions if you provide your HSA account details to your employer. Alternatively, you can contribute to your chosen HSA directly with post-tax dollars. Just make sure to claim the deduction for those contributions when you file your taxes!
Your employer may contribute to your HSA
While employers don’t have to contribute to your HSA, many do. According to a survey from the Plan Sponsor Council of America, more than 80% of employers contribute to their employees’ HSAs. The average employer contribution to an individual’s HSA is between $500-$700. That’s a nice little tax-free bonus!
HSA contribution limits are prorated
The annual limit on HSA contributions is $3,650 per year for individuals and $7,300 for families in 2022. However, the contribution limit is prorated according to the number of months that you are HSA-eligible. For example, if you switch jobs in the middle of the year and go from a non-high deductible health insurance plan to a high deductible plan, you can only contribute $1,825 that year.
You can change your contribution any time during the year
Whether you are contributing to your HSA through payroll deductions or on your own, you can change your contribution amount at any time. This is useful if you have changes to your health during the year. For example, if you were not already on track to max out your contributions but you discover that you are going to need surgery or are having a baby, you can increase your contributions to take full advantage of that tax-advantaged money. If you are contributing a lot to your HSA but find during the year that you have higher financial priorities such as paying off debt or balancing your budget, you can reduce your contribution.
