What You Need to Know About Health Savings Accounts (HSA)

Healthcare is expensive. And for many households, medical costs can feel unpredictable. A doctor’s visit, prescription, or unexpected procedure can quickly put pressure on an already tight budget.

That is where a Health Savings Account, or HSA, can help.

An HSA allows eligible individuals to set aside money specifically for healthcare expenses while receiving some significant tax advantages. If you have access to one, it can be a valuable part of your financial plan.

Here is what you need to know.

1. You Need an HSA-Eligible Health Plan

Not everyone can contribute to an HSA. To qualify, you generally must be covered by an HSA-eligible high-deductible health plan (HDHP) and meet certain other IRS requirements.

If your employer offers an HSA-eligible plan, you may be able to open an HSA through your workplace. You can also open one independently if you qualify.

Before contributing, verify that your health insurance coverage makes you HSA-eligible. Do not assume that simply having a high deductible qualifies you.

2. HSAs Come With Significant Tax Advantages

One of the biggest benefits of an HSA is its favorable tax treatment.

Contributions can generally be made with pre-tax or tax-deductible dollars. Money inside the account can grow tax-free. And withdrawals used for qualified medical expenses are also tax-free.

That combination makes the HSA unique.

Qualified expenses can include deductibles, copayments, prescriptions, dental care, vision care, and many other eligible healthcare expenses. Keep your receipts and records in case you need to document how HSA funds were used.

3. The Money Is Yours

An HSA is different from many employer-sponsored benefits because the money belongs to you.

If you change employers, the account goes with you. If you change health plans and are no longer eligible to make HSA contributions, the money already in your account remains yours and can still be used for qualified medical expenses.

And unlike many Flexible Spending Accounts (FSAs), HSA money generally does not have a “use it or lose it” rule. Your unused balance can roll over from year to year.

4. An HSA Can Help With Future Healthcare Costs

You do not necessarily have to spend your HSA dollars immediately.

If your finances allow, you can contribute to an HSA, pay some current healthcare expenses from your regular cash flow, and allow your HSA balance to grow for future needs. Many HSA providers also allow account holders to invest some of their balance.

This can make an HSA especially useful when preparing for healthcare expenses later in life. However, investing HSA dollars should not come at the expense of having enough readily available money for medical costs you may need to pay soon.

5. Know the Rules Before Making Withdrawals

HSA money receives special tax treatment because it is designed primarily for healthcare expenses.

If you withdraw money for a nonqualified expense before age 65, you will generally owe income taxes on the withdrawal plus an additional 20% tax. After age 65, the additional 20% tax no longer applies, although nonqualified withdrawals are generally still subject to ordinary income tax.

That makes it important to understand what counts as a qualified medical expense before using the money.

Steward Your HSA Wisely

From a biblical perspective, an HSA is simply another financial tool that can help you steward what God has provided.

Proverbs 21:5 says, “The plans of the diligent lead surely to abundance.” Planning for healthcare expenses may not feel exciting, but it is part of wise financial preparation.

If you are eligible for an HSA, take some time to understand your options. Used wisely, an HSA can help you prepare for medical expenses, reduce the financial stress surrounding healthcare, and create greater margin for the future.