December 31, 2022
What we’ll cover:
An HSA or Health Savings Account is where you could put away money to help pay for qualified medical expenses, such as prescriptions and doctor visits.
You need to meet these requirements to be able to fund an HSA:
In this article, we'll go over the basics of an HSA, so that you can decide if it's right for you. Keep in mind: We're talking only about HSAs here, not HRAs (Health Reimbursement Arrangements) or FSAs (Flexible Spending Accounts) which work a little differently.
While money in an HSA earns interest, it’s different from your typical savings account and it’s also different from a catch-all emergency fund. Here are some key highlights:
We get it, health expenses can sometimes be emergency expenses. But there are a few differences between having money in an account “for emergencies” and having an HSA that’s meant only for medical expenses and that has its own IRS category.
If you’re contributing money to your HSA, you won’t pay federal taxes on the interest, unlike the interest you earn with a traditional savings account or a certificate of deposit.
Depending on how it’s funded, there could be an additional benefit: If the money you contribute to an HSA is taken out of your paycheck before taxes, this could lower your taxable income. If you fund an HSA using after-tax dollars, you may be able to deduct these contributions on your tax returns, but it’s a good idea to double-check with a tax professional to see if this applies.
Having different buckets for different expenses is a tenet of budgeting and long-term financial planning.
Because you can only use the money tax-free for qualified medical expenses, when you contribute money to an HSA, you’re creating a pool of funds for this specific type of expense.
If you use HSA funds for things that aren’t “qualified medical expenses” you’ll have to pay federal taxes.
The IRS outlines what is considered a qualified medical expense. (see IRS Publication 969: Health Savings Accounts). Your insurer will also be able to guide you about what you can use the money for. In general, eligible expenses include the medical bills you pay before reaching your deductible, co-pays, co-insurance and some over-the-counter medicines.
Good to know: Under the 2020 CARES Act, in response to COVID-19, some rules about how you can use HSA funds have changed. Contact your HSA servicer, health insurer and/or human resources department for further information. You can also visit the IRS website here.
HSAs work a lot like typical savings accounts – you deposit money and it earns interest.
There are two ways to fund your HSA:
In 2022, you’ll be able to deposit up to $3,650 ($3,850 for 2023) to your HSA if the policy is just for you. If the policy covers your family, you’ll be able to deposit up to $7,300 ($7,750 for 2023). And if you're 55 or older, you could make "catch-up" contributions of up to $1,000.
Employers sometimes contribute to HSAs, which can increase your savings.
For one, the money is always yours. If you change jobs, if you change insurers or if you retire, it doesn’t change things: The money you’ve contributed travels with you.
Another benefit is that there’s no deadline to use the money. You’re not required to use the money in your HSA by a certain date or age.
Generally speaking, HSA funds may not be used to pay premiums. But there are a few exceptions - for example:
See IRS Publication 969's "Distributions from an HSA" for more details.
As long as you’re covered by an HDHP, you can add money to your HSA. If you’re covered by a partner’s plan, you can contribute to your HSA as long as their plan is also a HDHP.
If you switch to a health care plan that is not an HDHP, you get to keep the money you’ve saved in your HSA. You can also continue to spend the money on qualified medical expenses. The only real change is that you won’t be able to add money to your HSA if your new plan is not an HDHP.
If you're under 65, your withdrawals will be taxed as income, and you can get socked with an additional 20% tax if you use the money for something that’s not on the IRS’s list of approved medical uses.
Over 65? You won’t have to pay the additional 20% tax, but your withdrawals could be taxed as income if you use the money for something that’s not a qualified medical expense.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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