Healthcare can be expensive. Whether due to mounting bills resulting from an unexpected diagnosis, emergency room care, or routine lab work, costs add up fast – even with insurance. Alternative therapies and disability support services not covered by standard health insurance plans can also put pressure on your finances.
A health savings account could provide the financial cushion you need today and give you a smart way to reduce medical expenses in retirement.
What Is a Health Savings Account?
A health savings account (HSA) allows you to use money deposited into the account to pay or be reimbursed for medical and dental expenses not covered by health insurance. As HSAs are tax-advantaged accounts, you don’t pay taxes on your deposits or withdrawals for qualified health expenses. These accounts are designed for individuals and families enrolled in high deductible health plans (HDHPs).
HDHPs typically have:
- Higher annual deductibles - the amount you must pay out of pocket before the insurance company starts covering healthcare costs. Deductible amounts vary by plan but typically have a minimum threshold of $1,500 for individuals and $3,000 for families.
- Lower monthly premiums - the amount you pay monthly to maintain insurance coverage. Reduced premiums can help offset higher annual deductibles.
- Higher out-of-pocket limits - the maximum you must pay in a calendar year for medical expenses under your insurance plan. For the calendar year 2022, limits are set at $7,050 for individual plans and $14,100 for family plans.
HSAs have eligibility requirements that must be met to open an account. They require that:
- You are enrolled in a high deductible health plan (HDHP)
- You have no other health coverage (with few exceptions)
- You aren’t enrolled in Medicare
- You can’t be claimed as a dependent on someone else’s tax return
Examples of Qualified Medical Expenses
As long as you use your HSA balance to pay for qualified medical expenses, withdrawals won’t be taxed as regular income or subject to a 20% tax penalty. IRS Publication 502 is updated every year and provides an extensive list of qualified medical expenses, including:
- Eye exams
- Dental procedures
- In-home nursing
- Long-term care
- Addiction treatment
- Prescription medication
- Copayments, deductibles, and coinsurance
- Vision correction supplies, equipment, and procedures
- COVID-19 home testing and related personal protective equipment (PPE)
- Special equipment installed in your home, i.e., railings, entrance and exit ramps, etc.
- And much more!
Qualified medical expenses are those that typically prevent or treat an illness or disability.
Annual contribution limits vary depending on who is covered under the HDHP and are subject to change each calendar year. For 2022, individuals can deposit up to $3,650. Family contributions are capped at $7,300. If you’re 55 or older, you can deposit an extra $1,000 into the HSA this year as a “catch-up contribution.” Some employers may offer to match deposits.
HSA contributions offer significant tax advantages regardless of when you deposit or withdraw the funds. Deposits are not taxed and could help reduce the amount you owe in federal income taxes without needing to itemize deductions.
You can withdraw funds to pay for qualified healthcare expenses today or let the balance earn interest and grow tax-free. The latter requires an HSA investment account, like the one offered by Lincoln Savings Bank. Funds roll over each year without penalty and do not expire. So there’s no need to transfer funds or empty the account if you change employers. Since you own the account, the balance is yours even if you switch employers or leave the workforce.
An HSA can give you peace of mind, knowing you have tax-free funds available to cover qualified out-of-pocket medical expenses. Contact a Lincoln Savings Bank HSA expert online or by phone at 800-588-7551 to learn more or open an account today!