Every dollar you contribute to an HSA and spend on eligible health and medical expenses is pre-tax, meaning you can essentially pay your medical bills with pre-tax money. Those are significant savings, no matter what tax bracket you're in.
If you have a high deductible health plan (HDHP), you're in good company—nearly 40% of adults ages 18 to 64 with employment-based health coverage had an HDHP in 2016, according to the CDC. And you're eligible for a Health Savings Account, or HSA, which can lead to big tax savings—but you may not be taking advantage of it.
Forty-three percent of employees enrolled in HSAs in 2017 didn't put any of their own money in them, according to a survey from Willis Towers Watson, which is a huge missed opportunity. Every dollar you contribute to an HSA and spend on eligible health and medical expenses is pre-tax, meaning you can essentially pay your medical bills with pre-tax money. Those are significant savings, no matter what tax bracket you're in.
There are a variety of strategies for using your HSA wisely. Here are some pointers:
Open the account
You're entitled to an HSA as long as you're covered by a high deductible health plan, which is any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. If you're eligible but haven’t opened one yet, not only are you missing the chance to contribute but if something happens, you can’t use HSA money to pay for medical expenses that occurred before you opened the account. Plus, many employers offer an HSA match—or even a no-strings-attached annual HSA contribution, so get on it. Call your human resources department to see what your firm's process is for opening an account. If your HDHP isn't employer-sponsored, you can start with your bank or your health insurer for options. You can open an HSA at any time—you don't have to wait for open enrollment.
Contribute as much as you can
In 2018, account holders can contribute up to $3,450 to an HSA for individual health coverage, or up to $6,850 for family coverage. But only 13% of account holders maxed out their HSA contribution in 2017, according to the Employee Benefits Research Institute, and 36% of HSAs didn’t get any contributions at all—employer or employee. Unlike a flexible spending account (FSA), funds in an HSA aren’t use-it-or-lose-it—the cash rolls over each year. So there’s no downside to saving more than you’ll need.
Invest your cash
Like other retirement accounts, your HSA money can be invested, giving you the option to grow your savings. If you leave your HSA money in cash—as the vast majority of HSA owners (96%) do—you’re missing the chance for growth. Consider what you’ll need in the short-term (what expenses do you anticipate taking out of the account in the next year?) and put the rest in an investment vehicle.
Know what’s covered
There are a large number of things you can pay for from your HSA cash. You can find a list of eligible expenses in IRS Publication 502, “Medical and Dental Expenses.” If it pertains to a physical or mental defect or illness, it may be something you can pay for from your HSA. Among the things covered: Copays for doctor visits, eyeglasses and contact lenses, dental work, prescriptions, costs for medical treatment and pregnancy tests.
Keep receipts until tax time
For HSA contributions, the deadline to contribute is actually April 15th of the following tax year, so you have extra time to save the maximum amount. Not sure how much to put in? Keep receipts for eligible expenses and add them up in April. Then make a contribution to your HSA (which lowers your taxable income for that year), and reimburse yourself from it. Voila, you’ve saved on your medical expenses.
Keep receipts forever
While there’s a calendar limit on when you can make contributions, there’s no limit on when you can submit for reimbursement. (Although eligible expenses must have been incurred while you had an HSA.) So, you can leave the money invested for a year or more and reimburse yourself for medical expenses at any point. Just make sure you keep your paperwork handy.
Think of it as an extra retirement account
If you’re viewing your HSA just as a way to pay your health expenses with pretax money, expand your horizons: The money will roll over year to year, meaning you can take your balance into retirement with you, when healthcare expenses are even more daunting. The contribution limit for family coverage is higher than the limit on an IRA—and you can save to both, should you choose to. When you’re contemplating the accounts you can use to sock away your retirement nest egg, the HSA should also be on your list.
An HSA is a great tool for managing healthcare costs and saving for the future—but you have to use it. If you have an HSA, think about whether you're doing as much as you could to maximize your savings.