Open enrollment for 2021 is in full swing, and it is very important to review your benefit offerings, and get educated on your chosen benefits. It’s important to review your options carefully, including the often-overlooked health savings account (HSA).
Many companies offer HSAs, but 80% of organizations say their employees don’t read benefits materials. If you’re one of the many people who glance at benefits paperwork before tossing it aside, you’re probably leaving money on the table by not understanding the advantages of an HSA.
HSAs can cover prescriptions, ambulance fees, and many other healthcare expenses. These accounts can be especially valuable during a pandemic because of the higher likelihood of medical costs. Plus, opening and funding an Health Savings Account can save you thousands of dollars in taxes.
In 2021, you can contribute $3,600 for individual coverage and $7,200 for family coverage (plus $1,000 more if you are 55 years or older). Some employers contribute to HSAs for their employees, but it’s important to remember that this amount counts toward your annual limit. If your company makes a $500 contribution to your HSA, for instance, $3,100 is the maximum you can contribute in 2021.
Tips To Benefit From Health Savings Account Tax Advantages
If you’re healthy and don’t have medical expenses during your plan year, Health Savings Account contributions can be carried over. The ability to invest and carryover funds makes them a great tax-advantaged savings vehicle. Here are some great strategies to maximize your HSA:
1. Learn the ins and outs of your plan
To be eligible for an Health Savings Account, you must be enrolled in a high-deductible health plan. Understand how a high-deductible health plan stacks up against other plans, your potential out-of-pocket costs, and what’s covered under an HSA.
For 2021, the IRS defines a high-deductible health plan as one with a deductible of at least $1,400 for individuals and $2,800 for families. That means you will pay at least this much out of pocket before your insurance kicks in. For people who make frequent visits to a doctor, a traditional healthcare plan may be more appropriate.
While hundreds of healthcare-related expenses are covered by HSAs, most medical expenses considered cosmetic or related to health insurance premiums aren’t eligible. For clarification, your HR or benefits team can provide a list of HSA-eligible expenses and answer any questions you might have.
2. Max out your HSA early
HSA tax advantages are greater than the tax benefits from other investment accounts. Traditional 401(k) plans and IRAs provide tax benefits upfront, while Roth 401(k)s and Roth IRAs provide them at withdrawal. A Health Savings Account offers tax benefits upfront and at withdrawal. And while 401(k) and IRA contributions are still subject to payroll taxes, contributions made to your HSA directly through payroll deductions avoid both Social Security and Medicare tax. If your company has a 401(k) match, you should invest whatever you need to get that match first. Then, max out your HSA before you contribute to any other retirement accounts.
Healthcare costs are hard to predict, and an unexpected visit to the hospital could mean taking out a loan against your 401(k) or piling on credit card debt. An HSA gives you access to funds when medical expenses come up and a welcome tax break. Why not invest here first?
3. Add cash and let it grow
Investing your contributions is one of the lesser-known advantages of an HSA. Only 6% of Americans who have HSAs invest their funds, and the rest are overlooking an enormous benefit of HSAs — compound growth. Some people think to contribute the maximum to their HSAs each year and treat the accounts as long-term investment tools. Instead of using their HSAs to cover medical bills, they invest that money and let it compound to receive every HSA tax advantage.
Though few people understand what an HSA is and how it works, the benefits are unmatched when it comes to long-term savings for medical expenses or retirement. Explore your company’s healthcare plans and the options available to you, and then get started on the road to a comfortable retirement by setting up an HSA account — and making the most of it.