Health Savings Accounts (HSA) are an excellent way to pay for medical expenses. They offer unparalleled tax benefits and can be used in a number of creative ways to achieve a variety of financial goals.
As a refresher, those with high deductible health insurance plans can open an HSA. There are annual contribution limits, currently $3,350 for individuals and $6,750 for families. These limits can change from year to year. Next year, for example, the limit for individuals rises to $3,600, while the family limit raises to $7,200.
An HSA is intended to help individuals and families offset the growing costs of healthcare. As you’ll see below, an HSA can accomplish this goal and so much more:
- An HSA offers triple tax benefits: An HSA is the crown jewel of tax deferred accounts. It combines the advantages of both a traditional and Roth retirement account. Contributions to an HSA are not taxed. Funds in an HSA grow tax-free. And distributions for qualified medical expenses are not taxed. It’s the closest thing a free lunch you’ll find anywhere.
- An HSA can grow from year to year: Unlike a Flexible Spending Account, an HSA is not “use it or lose it.” Your balance can continue to grow year after year. In fact, one could wait for decades before using the funds in an HSA.
- An HSA balance can be invested: Funds in an HSA can be invested in mutual funds. The best HSA accounts offer low-cost index funds as investment options. For those looking to invest their HSA contributions, the investment options are a key consideration when selecting an HSA administrator.
- An HSA can cover more than medical expenses: Qualified expenses also include dental and vision related costs. I recently had an eye exam and purchased new prescription glasses. Both of these expenses can be reimbursed from our HSA, according to IRS Publication 502.
There is so much more to learn about HSA’s…but we’ll stop here for now.