HSAs for Individuals (2024)

FAQs

Are HSAS actually worth it? ›

The Bottom Line. For those who choose high-deductible health plans (HDHPs), an HSA has real advantages. It can offset your medical costs, reduce your taxes, and give you a long-term tax-advantaged savings account. An HDHP isn't the best option for everyone, but having one is the only way to get access to an HSA account ...

- Requires detailed tracking of transactions and receipts. - IRS regulations can complicate expense tracking. - Accounts can be invested to grow over time. - Risks of penalties and taxes for non-qualified expenses.

An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA.

But either way, your HSA custodian will have your back. They'll send you Form 5498-SA, showing how much you contributed to your HSA. And if you made any withdrawals, they'll also send you Form 1099-SA, showing the amount of the withdrawals. So there you have it.

Max out your contributions if you can

If you're able, consider contributing the annual maximum amount. The more you can contribute, the more you can benefit from the HSA's potential tax advantages.

A health savings account (HSA) is a type of bank account that helps you pay less taxes while saving money on a range of health care expenses... Using an HSA can save an average of $955 per year in taxes for individuals or $1,909 per year for families.

HSAs might not make sense if you have some type of chronic medical condition. In that case, you're probably better served by traditional health plans. HSAs might also not be a good idea if you know you will be needing expensive medical care in the near future.

HSAs: The basics

What's more, unlike health flexible spending accounts (FSAs), HSAs are not subject to the "use-it-or-lose-it" rule. Funds remain in your account from year to year, and any unused funds may be used to pay for future qualified medical expenses.

Examine your budget and financial situation. PPOs typically have higher premiums but lower out-of-pocket costs for routine services. HSAs may have lower premiums but higher out-of-pocket costs until the deductible is met. Consider how these costs align with your budget.

The ultimate loophole available to almost everyone under the age of 65 in our tax code is the Health Savings Account (HSA). It is the only account you can contribute to and deduct the contribution and then withdraw the money tax free. Think about that, a tax deduction going in and no taxes going out.

What is the 12 month rule for HSA? ›

The Last Month Rule

The catch? There is a testing period of twelve months. This means you must stay eligible through the end of the next year, or else you will face taxes and penalties. For example, let's look at the individual above who became HSA-eligible on December 1.

Generally, you can't use your HSA to pay for expenses that don't meaningfully promote the proper function of the body or prevent or treat illness or disease. Nutritional supplements and weight loss programs not prescribed by a physician are examples of expenses that would not be covered by your HSA.

If you discover you accidentally paid for something other than a qualified medical expense from your HSA, you may repay the mistaken distribution prior to filing your federal taxes for the tax year of the mistake.

You must report contributions from your HSA on IRS Form 8889. Get 5498-SA information in the "If I don't have a 5498-SA, how can I get my contributions by tax year?" question below. Find a sample of form 5498-SA from the IRS.

You can pay expenses out of pocket and reimburse yourself when you need the money since there's no "use it or lose it" rule with HSAs. The benefit of leaving your HSA funds in the account until you need them, is it lets your money continue to grow tax-free, adding to your HSA's total value.

If you don't spend the money in your account, it will carryover year after year. Your HSA can be used now, next year or even when you're retired. Saving in your HSA can help you plan for health expenses you anticipate in the coming years, such as laser eye surgery, braces for your child, or paying Medicare premiums.

Account holders who don't invest their HSA contributions could be missing an opportunity to earn tax-free returns. We generally suggest keeping two to three years' worth of routine medical expenses in cash, cash investments, or similar low-volatility investments within your HSA.

First off, most experts would recommend maxing out HSA contributions before maxing out 401(k) contributions because of the tax advantages that come with the HSA. There's no minimum age for HSA fund distributions, so when you need it to spend money on health care, it's got your back.

Still, despite workers spending more on health care in 2022 than in previous years, average balances in HSAs increased, rising from $4,318 in 2021 to $4,607.