Hsa what is

A primary concern many consumers have about foregoing a preferred provider organization PPO , health maintenance organization HMO plan, or other health insurance in favor of a high-deductible health plan is that they will not be able to afford their medical expenses. High expenses can be one reason these plans are more popular among affluent families who will benefit from the tax advantages and can afford the risk.

With an HDHP, by contrast, you're spending more closely matches your actual healthcare needs. Of course, if you know your healthcare costs are likely to be high—a woman who is pregnant, for instance, or someone with a chronic medical condition—a health plan with a high deductible may not be the best choice for you.

But keep in mind that HDHPs completely cover some preventive care services before you meet your deductible. All in all, an HDHP might be more budget-friendly than you think—especially when you consider its advantages for retirement. As mentioned above, your HSA contributions are tax-deductible until you sign up for Medicare.

The contribution limits are adjusted annually for inflation. The contribution limit for a family health savings account in You can contribute up to the maximum regardless of your income, and your entire contribution is tax-deductible. You can even contribute in years when you have no income. You can also contribute if you're self-employed. This may sound counterintuitive, but we're looking at an HSA primarily as an investment tool.

Granted, the basic idea behind an HSA is to give people with a high-deductible health plan a tax break to make their out-of-pocket medical expenses more manageable. But that triple tax advantage means that the best way to use an HSA is to treat it as an investment tool that will improve your financial picture in retirement.

And the best way to do that is to never spend your HSA contributions during your working years and pay cash out of pocket for your medical bills. In other words, think of your HSA contributions the same way you think of your contributions to any other retirement account: untouchable until you retire. If you absolutely must spend some of your contributions before retirement, be sure to spend them on qualified medical expenses.

These distributions are not taxable. The key to maximizing your unspent contributions, of course, is to invest them wisely. When deciding how to invest your HSA assets, make sure to consider your portfolio as a whole so your overall diversification strategy and risk profile are where you want them to be.

Your employer might make it easy for you to open an HSA with a particular administrator, but the choice of where to put your money is yours.

Let's do some simple math to see how handsomely this HSA savings and investment strategy can pay off. What about a more conservative estimate? Try out an online HSA calculator to play with the numbers for your own situation. Here are some options for using your accumulated HSA contributions and investment returns in retirement. Remember, distributions for qualified medical expenses are not taxable, so you want to use the money exclusively for those expenses if possible. There are no required minimum distributions , so you can keep the money invested until you need it.

If you do need to use the distributions for another purpose, they will be taxable. In this way, an HSA is effectively the same as a k or any other retirement account, with one key difference: There is no requirement to begin withdrawing the money at age By waiting as long as possible to spend your HSA assets, you maximize your potential investment returns and give yourself as much money as possible to work with.

You obviously want to avoid selling investments at a loss to pay for medical expenses. When you open your HSA, you will be asked to designate a beneficiary to whom any funds still in the account should go upon your death. If you're married, the best person to choose is your spouse because they can inherit the balance tax-free. As with any investment with a beneficiary, however, you should revisit your designations from time to time because death, divorce, or other life changes may alter your choices.

Your plan administrator will have a designation-of-beneficiary form you can fill out to formalize your choice. Funds captured in an HSA can help out with such skyrocketing costs. Qualified payments for which tax-free HSA withdrawals can be made include:. Helpful links Aetna secure provider website opens in secure site Aetna dental opens in secure site Coventry secure provider website opens in secure site Check fee schedules Check precertification list Online Medicare directory Online provider directory Search drug formularies Update provider data Update pharmacy data.

Producer World. About us. About us overview. Who we are. Investor information. Health section. What's an HSA, and why should you have one? By Alice Gomstyn. What is an HSA? What types of health care expenses are HSA eligible? Over-the-counter drugs including allergy medicine, cold medicine and pain relievers. Tampons, pads and other feminine hygiene products. Drug addiction treatment. Complementary treatments, such as chiropractor visits and massage.

Glasses and contact lenses, and many vision supplies like safety goggles, sunglasses and contact lens solution. Many fertility and maternity services, including IVF, breast pumps and breast milk storage bags. Related content. Read More Read Less. HSA-qualified health plans typically cost less than traditional plans and the money saved can be deposited into an HSA for immediate use or long-term savings.

HSA balances earn tax-free interest, roll over from year to year and can be invested to accelerate growth. Tax-free distributions are still available for qualified medical expenses. All of the money in an HSA including any contributions deposited by an employer is owned by the employee even if they leave their job, lose their qualifying coverage or retire.

The money in an HSA never expires. HSAs earn interest just like a traditional savings account. But unlike a traditional savings account, interest earned on an HSA is not taxed. Once an account meets a certain balance threshold, funds can be invested in mutual funds to maximize HSA earning potential. After age 65 employees can spend HSA money on non-medical items without paying a penalty. Non-medical withdrawals after age 65 are taxed as income just like withdrawals from a K or IRA.

By Mayo Clinic Staff. Thank you for Subscribing Our Housecall e-newsletter will keep you up-to-date on the latest health information. Please try again. Something went wrong on our side, please try again. Show references Publication , health savings accounts and other tax-favored health plans. Internal Revenue Service. Accessed Feb. Using a flexible spending account FSA. Frequently asked questions for high deductible health plans, health savings accounts, and health reimbursement arrangements.

Office of Personnel Management. Accessed Jan. Cliff BQ, et al. Attitudes about consumer strategies among Americans in high-deductible health plans. Medical Care. Gordon D, et al. Health care consumer shopping behaviors and sentiment: Qualitative study. Journal of Participatory Medicine. Health savings accounts. National Conference of State Legislatures. Comparison chart for health savings account, health reimbursement arrangement, health care flexible spending account and limited expense health care flexible spending account.

Ellison J, et al. Health Affairs.