Health Sav­ings Accounts (HSA) are great ways to save tax-free mon­ey for med­ical expens­es both in the cur­rent term, and for your retire­ment years. By mak­ing wise choic­es, you can max­i­mize the ben­e­fit of these fan­tas­tic sav­ings accounts. Let’s take a quick look at the basics and then explore some tips on how to make your HSA mon­ey grow.

What is an HSA? 

Accord­ing to the web­site HealthCare.gov, a Health Sav­ings Account is a type of sav­ings account that lets you set aside mon­ey on a pre-tax basis to pay for qual­i­fied med­ical expens­es. By using untaxed dol­lars in an HSA to pay for deductibles, copay­ments, coin­sur­ance, and some oth­er expens­es, you may be able to low­er your over­all health care costs. HSA funds gen­er­al­ly may not be used to pay premiums.

In order to con­tribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). A HDHP is defined as a plan with a high­er deductible than a tra­di­tion­al insur­ance plan. The month­ly pre­mi­um is usu­al­ly low­er, but you pay more health care costs your­self before the insur­ance com­pa­ny starts to pay its share (your deductible). A high deductible plan (HDHP) can be com­bined with a health sav­ings account (HSA), allow­ing you to pay for cer­tain med­ical expens­es with mon­ey free from fed­er­al taxes.

HSA vs Tra­di­tion­al Insurance

As men­tioned, you are able to open a Health Sav­ings Account when you enroll in your employer’s High Deductible Health Plan. A HDHP is dif­fer­ent from tra­di­tion­al insur­ance in that with tra­di­tion­al insur­ance, you and your employ­er both con­tribute to the cost of your health insur­ance each month—otherwise known as the pre­mi­um. You then have a fixed cost—a “co-pay”—that you pay when you vis­it a doc­tor, pay for pre­scrip­tions, or have a health pro­ce­dure. With a HDHP, the patient is incen­tivized to shop around for low­er cost doc­tor vis­its and pro­ce­dures since they are pay­ing for those costs out of their pock­et at the full amount from the begin­ning until the high deductible amount is met.

Now, when used in tan­dem, the two com­po­nents of the HDHP and the HSA have the poten­tial to save the insured par­ty mon­ey on their health care expens­es. Here’s how it works:

  1. Con­tri­bu­tion Limits

Each year, the gov­ern­ment puts a cap on the amount of mon­ey that an indi­vid­ual and a fam­i­ly can con­tribute to their HSA. For 2020, an indi­vid­ual can con­tribute up to $3550 and a fam­i­ly can add in $7100 to their account. In 2021, the amounts both increase: indi­vid­u­als will be $3600 and fam­i­lies will be able to deposit $7200.

  1. Triple Tax Benefits

When you con­tribute to your HSA, your mon­ey gets a triple tax ben­e­fit. There is a 0% tax on deposit­ed mon­ey, your mon­ey grows tax-free while in the account, and, when used for qual­i­fied med­ical expens­es, you can with­draw the mon­ey tax-free.

  1. Roll-over

The mon­ey that you deposit into your HSA is yours to keep–forever. If you change jobs, the mon­ey fol­lows you. If you don’t use the mon­ey you’ve con­tributed by the end of the year, it rolls over to the next year with no penalty.

Tips to Max­i­mize the Ben­e­fits of Your HSA This Year

Don’t be com­pla­cent to let your tax-free hard-earned mon­ey sim­ply sit in your HSA all year! You can by mak­ing some wise choic­es. Here’s some tips on how to do this:

  1. Do you get a bonus at the end of the year? You can use that bonus mon­ey to bulk up your HSA until April 15 of the fol­low­ing cal­en­dar year. Just make sure you don’t con­tribute more than the annu­al allowed amount or you will pay a 6% tax on the overage.
  2. Once you hit the min­i­mum con­tri­bu­tion amount for your par­tic­u­lar plan, you can invest a por­tion of the con­tri­bu­tions in an IRA account and watch your tax-free dol­lars grow even more! Check with your plan man­ag­er regard­ing the min­i­mum amount required.
  3. There is a once-in-a-life­time allowance for you to move mon­ey over from a tra­di­tion­al or Roth IRA to your HSA. This allows you to kick­start that HSA so that you can begin using that mon­ey for expens­es right away. The annu­al con­tri­bu­tion lim­it still applies to this sce­nario for the indi­vid­ual and fam­i­ly amount.
  4. Long term care insur­ance is expen­sive and you can use your HSA mon­ey to help pay for those insur­ance pre­mi­ums. Again, check with your plan man­ag­er to make sure you are stay­ing with­in the allowed range for using this mon­ey for those premiums.
  5. Final­ly, name your spouse as the ben­e­fi­cia­ry of your account. When you pass away, your spouse will have access to these funds with the same tax ben­e­fits as you did. In fact, your HSA mon­ey can even con­tin­ue to grow tax-free after you pass.

Find­ing ways to save mon­ey is always a good idea. Find­ing ways to max­i­mize the ben­e­fit of your already saved mon­ey is even better!