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- An HSA, or health savings account, is a tax-advantaged savings and investment account designed to help manage healthcare expenses.
- The IRS sets a limit on how much you can contribute to an HSA, but unlike a Flexible Spending Account (FSA), your balance carries over from year to year.
- HSA accounts have better tax benefits than any other type of account, so you should consider taking advantage if you are eligible.
- Learn more about opening an HSA with Lively »
A health savings account, more commonly called an HSA, is a tax-advantaged account you can use to save and invest for medical expenses. The account is a secret weapon for retirement and something I'm always sure to take full advantage of. In fact, just last week I put $7,000 in my family's HSA for 2019. Here's why anyone eligible should take advantage of an HSA.
What is an HSA?
An HSA is a tax-advantaged account designed to save and invest for healthcare expenses. If you have a qualifying high deductible insurance plan (HDHP), you are eligible for an HSA.
HSA accounts can work like a hybrid of a bank account and a brokerage account. You can keep cash, investments, or a combination in an HSA at most popular HSA providers. I recently opened a new HSA account at Lively to save on fees compared to the old HSA I opened through an employer.
HSA contributions are a pre-tax deduction. That means you don't pay any taxes on contributions to the account in the year you contribute. Withdrawals are also tax-free when paying for qualified medical expenses like doctor's appointments, hospital stays, dental work, prescription medications, and other eligible health-related purchases.
Annual HSA contribution limits
The IRS puts limits on how much you can contribute to an HSA per year. The limits tend to slowly rise over time.
For 2019, the maximum you can put into an HSA is $3,500 if you are a single tax filer or $7,000 for a family. For 2020, the maximum is $3,550 for individuals and $7,100 for families.
An HSA is the best investment account for taxes
HSA accounts have unique tax advantages over any other type of account. With an HSA, you get to contribute and withdraw tax-free. That's better than you get with any kind of retirement account.
For example, with a traditional IRA or 401(k), your contributions are tax-free but withdrawals are taxable. With a Roth IRA, contributions are taxed and withdrawals are tax-free. An HSA is tax-free on both ends.
You don't have to use all of your HSA funds in the year you contribute, which is different from a Flexible Spending Account (FSA). You don't even have to reimburse yourself for a medical expense immediately. You can pay for the expense out of pocket and reimburse yourself at any time in the future.
You could even allow your reimbursements to stack up for years and use your HSA as a retirement account. While the main purpose of an HSA is healthcare expenses, there is no rule saying you can't time your withdrawals for a date far off in the future during retirement.
Maximize your HSA savings every year
Healthcare is my family's single biggest expense. My monthly health insurance premium is more than my mortgage. I'm up for anything I can do to save money on healthcare. This tax-advantaged account is a great tool to save me a good chunk of change on medical expenses.
When my wife has given birth, I didn't have to worry about a cash crunch. We knew we could pay with our HSA. I invest any leftover funds to keep on growing for the future. As of now, the average retiree spends six figures on healthcare. I would rather over-save than run out of money.
I've put the maximum into my HSA for years and don't plan to stop anytime soon. If you are eligible for an HSA, it's a great idea to do the same.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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