How to Use a Health Savings Account If I Qualify

Planning for the future means finding all the ways possible to minimize tax payments to the IRS. 

You may be sitting on just what you need to save significantly on taxes without even realizing it – a health savings account.

This is because a health savings account is triple tax-advantaged:

1. The money you put in your health savings account is 100% tax-deductible. 
2. You don’t pay taxes on any interest or earnings from your health savings account.
3. As long as the money you withdraw from your health savings account is used for eligible purchases, your withdrawals are tax-free.

But, many people don’t really understand how HSAs work or how to use them, which means there is a lot of money potentially being wasted.

According to the Devenir HSA Research Report 2019, “HSA assets grew by almost $6 billion in January 2020 to reach $71.7 billion, up 9% since the end of 2019. Accounts grew by almost 4%, with the total number of HSA accounts rising to an estimated 29.4 million.”¹

However, even with 29.4 million health savings accounts, only 41% of HSA holders are using their accounts to save for healthcare costs in retirement, as found in Schwab’s 401(k) Participant Survey 2020.² 

That means 59% of HSA participants are missing out on major advantages to grow their retirement accounts and save on taxes.³ 

Keep reading to learn more about how health savings accounts work, HSA contributions limits for 2020, changes for next year, and how you can potentially maximize your savings.

How a Health Savings Account Works

Whether you are already taking advantage of an HSA or are considering one, it’s important to know how it works.

Love My HSA explains it this way: “A health savings account (HSA) is a tax-advantaged account that works in conjunction with an HSA-eligible health plan that meets IRS guidelines and allows the participant to save tax-free money for eligible medical expenses.”⁴ 

What makes a health savings account different from other types of savings accounts, such as a 401(k), is that you are not taxed on withdrawals.

Once enrolled in an HSA, the money in the account is yours – even if you change jobs or health plans – with the money rolling over from one year to the next.

You and your employer can contribute to your HSA at any time (until you reach the HSA contributions limit for 2020).

This is why many people choose to have money taken directly from their paycheck and deposited into their health savings account.

You can use your HSA money however you want, as long as it is used for HSA-qualified medical expenses.

Not only is the money you put in and take out tax-free, but the money in your HSA also grows tax-free.

Love My HSA explains, “Once your balance reaches the investment threshold, you can begin investing in mutual funds. If you earn money on your investments, you don’t pay income tax on that money, either.”⁵ 

Then, once you turn age 65, you can withdraw money from your health savings account to use for eligible medical expenses tax-free.

What Are the Eligibility Requirements for a Health Savings Account?

There are four main eligibility requirements for an HSA. 

1. You must be enrolled in a high-deductible health plan (HDHP). For 2020, the minimum deductible is $1,400 for individuals and $2,800 for families.
2. The out-of-pocket maximums for 2020 cannot surpass $6,900 for individuals and $13,800 for families.⁶
3. You cannot be enrolled in any other health insurance plan or Medicare.
4. You cannot be claimed as a dependent on someone else’s tax return.

While these are the four main eligibility requirements for a health savings account, it is wise to speak with a financial advisor to make sure you qualify.

What Are Eligible Health Expenses for Health Savings Accounts?

A triple tax-advantaged account sounds great, but it doesn’t mean you get to spend all your money tax-free however you want.

HSAs were strictly designed for medical expenses – specifically “qualified” medical expenses.

The IRS defines medical expenses this way: “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.”⁷ 

Generally, qualified medical expenses cover medical, dental, vision, and mental health issues.

However, what the IRS considers a qualified medical expense is constantly evolving.

For example, in June 2020, the IRS announced that additional items are considered “qualified medical expenses” and may be reimbursed.⁸ 

This includes the cost of menstrual care products, so those with an HSA can be reimbursed for tampons and pads.

Additionally, over-the-counter medications are now reimbursable. 

Forbes explains, “You can even use an HSA to save on a typical trip to the CVS. Thanks to a tax relief provision tucked in the last Covid-19 stimulus package, you can use money you stash in an HSA or FSA (more on those later) for over-the-counter medications like Tylenol or Flonase[…]That reverses Obamacare restrictions on OTC meds requiring a doctor’s prescription for them to be eligible for reimbursement.”⁹ 

You can also use your health savings account to pay your annual health plan deductible. 

How to Use an HSA to Its Full Advantage

To maximize savings, learn how to use your HSA to its full advantage.

One way to do so is to contribute as much as you can to your HSA every year.

Since this money is tax-free, you can treat your HSA as a retirement savings account when you may have more medical expenses.

You may want to consider contributing to your HSA and just leaving it alone and paying for medical expenses apart from your HSA.

As the money sits in the account, it can grow tax-free (through investing).

Additionally, keep all your receipts.

There is no time limit for submitting receipts for eligible purchases for reimbursement from your HSA.

This means that after retirement you can technically submit thousands of dollars’ worth of receipts for reimbursement and get the money tax-free. 

HSA Contributions Limits 2020

Health savings account contributions limits for 2020 are $3,350 per individual and $7,100 per family.  

Additionally, those 55 and older can contribute an extra $1,000 per year at any time during the year until the April 15 tax deadline. This catch-up contribution is also tax-free.

HSA Contribution Changes for 2021

The HSA contribution limits will increase for 2021: $3,600 per individual and $7,200 per family.

If you are age 55 and older, you will be able to continue to contribute an extra $1,000 per year at any time during the year until the April 15 tax deadline.¹⁰ 

How to Get Started with a Health Savings Account

Contact your health plan provider to determine if you have a high-deductible health plan (HDHP) and are eligible for a health savings account.

Open an HSA account.

Sign up for pre-tax payroll contributions so that money is deposited into your HSA every month.

Watch the money in the account grow.

Use it on medical expenses, or save it. The choice is yours. Just remember to save your receipts.

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Sources:

1. https://www.devenir.com/wp-content/uploads/2019-Year-End-Devenir-HSA-Research-Report-Executive-Summary.pdf
2. https://content.schwab.com/web/retail/public/about-schwab/schwab_2020_401k_survey
3. https://www.msn.com/en-us/money/retirement/59percent-of-health-savings-account-participants-are-missing-out-on-this-important-retirement-strategy/ar-BB19wQjy
4. https://www.lovemyhsa.com/images/HSA%20Consumer%20Fact%20Sheet_WH.pdf
5. https://www.lovemyhsa.com/images/HSA%20Consumer%20Fact%20Sheet_WH.pdf
6. https://www.lovemyhsa.com/images/HSA%20Consumer%20FAQ_WH_092020.pdf
7. https://www.irs.gov/publications/p502
8. https://www.irs.gov/newsroom/irs-outlines-changes-to-health-care-spending-available-under-cares-act
9. https://www.forbes.com/sites/ashleaebeling/2020/05/20/irs-announces-2021-health-savings-account-contribution-limits/#5ae8cc876875
10. https://wahoo-ashland-waverly.com/business/investment/personal-finance/this-tax-advantaged-account-is-changing-in-2021-heres-what-you-need-to-know/article_bbe42130-c09c-5a93-9993-ad4004d1da5f.html