The Tax Advantages of Health Savings Accounts

With insurance costs and premiums on the rise, many people are looking for ways to make expenses associated with medical care more affordable. One solution is to start a Health Savings Account, better known as an HSA.

So, what exactly is an HSA, and how can it benefit you? A Health Savings Account is like a personal savings account, but it can only be used for qualified health care expenses. To be eligible, you must be enrolled in a High-Deductible Health Plan (HDHP). Health Savings Accounts also have some important tax advantages. An HSA can help patients with high-deductible health insurance plans cover their out-of-pocket costs.

The good news? Contributions to HSAs generally aren't subject to federal income tax, and the earnings in the account grow tax-free. Money in an HSA rolls over at the end of the year so it's available for future health expenses.

Although exemption from federal income tax might be the biggest advantage of having an HSA, there are other advantages, too. These include:

__Many Expenses Qualify.__

Eligible expenses include a wide range of medical, dental and mental health services.

__Others Can Contribute.__

Contributions can come from you, your employer, a relative or anyone else who wants to add to your HSA. The Internal Revenue Service does, however, set limits. For 2020, the limit will be $3,550 for individuals and $7,100 for families, plus an additional $1,000 "catch-up" contribution for anyone age 55 or older by the end of the tax year.

__Pre-Tax Contributions.__

Contributions are typically made with pre-tax dollars, through payroll deductions at your employer. As a result, they are not included in your gross income and are not subject to federal income taxes. In most states, contributions are not subject to state income taxes.

__Tax-Deductible After-Tax Contributions.__

If you make contributions with after-tax dollars, you can deduct them from your gross income on your tax return, reducing your tax bill for the year.

__Tax-Free Withdrawals.__

Withdrawals from your HSA are not subject to federal — or in most cases, state — taxes if you use them for qualified medical expenses.

__Tax-Free Earnings.__

Any interest or other earnings on the money in the account is tax-free.

__Annual Rollover.__

If you have money left in your HSA at the end of the year, it rolls over to the next year.

__Portability.__

The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, go to work for a different employer or retire.

__Convenience.__

Most HSAs issue a debit card, so you can pay for prescription medications and other eligible expenses right away. If you wait for a bill to come in the mail, you can call the billing center and make a payment over the phone using your debit card.

__Retirement.__

After you turn 59 1/2, there is also the option to withdraw the money for non-health care expenses and then pay federal income taxes on it. The HSA then acts much like a traditional IRA since the HSA holder pays ordinary income taxes on nonmedical-related withdrawals, with the added perk of no mandatory disbursements usually required by traditional IRAs.

__Easy set up.__

Remember that insurance is completely separate, so you do not call your insurance company to set up your HSA. They don't administer them; they just sell insurance. Instead, you can call or stop by Montgomery Bank.

We look forward to helping you save money. To set up an HSA, stop by any Montgomery Bank branch or call 1 (800) 455-2275, and a Montgomery Bank representative will be happy to assist you.