What is a health savings account?

A health savings account (HSA) is a tax-advantaged way to save for qualified medical expenses. Because it offers potential tax advantages and money within the account can be invested, an HSA can be used to pay for both near-term medical expenses and expenses in retirement. HSAs are portable, meaning they move with you when you change employers. An HSA has triple tax advantages:

• Your pre-tax contributions reduce your taxable income (if you choose to fund your account with after-tax contributions, you may be able to take a deduction when you file your taxes)

• The money isn’t taxed while it’s in the account, even if it earns interest or investment returns

• As long as the funds are used for qualified expenses, you won’t owe taxes when you take money out of the account

PRO TIP – After reaching age 65, you can withdraw money from your account for any reason at all without paying a penalty; this will be considered taxable income, though, so you’ll pay taxes on these types of withdrawals.

How does it work?

An HSA must be paired with an HSA-eligible health plan. Once you’re enrolled in this type of health plan, you can make pre-tax contributions to the HSA, creating a cash cushion to help offset the higher deductibles HSA-eligible health plans usually have.

If you don’t need the money right away, you can save it until you do. Many HSAs allow you to invest the money after reaching a certain threshold. (These features set HSAs apart from another popular account, the flexible spending account (FSA). FSA money typically has to be used by the end of the plan year, can’t be invested, and can’t be taken with you to another employer.)

Your employer may make matching contributions to your HSA, so be sure to ask – you won’t get a tax deduction on what your employer contributes, but this extra money has the potential to grow over time if invested.

What’s a qualified medical expense?

Generally, qualified expenses include things big and small, from ongoing costs to unexpected ones, including doctor visits, medications, X-rays, medical equipment, dental care, vision care, and much more. IRS Publication 502 explains the expenses in detail.

What are the contribution limits?

Contributing to your HSA early and investing those savings can help you better afford medical care in the future. Pay attention to the annual contribution limits:

• In 2024: $4,150 (individual coverage) / $8,300 (family coverage)

• In 2025: $4,300 (individual coverage) / $8,550 (family coverage)

Keep in mind: if you are at least 55 years old, you can contribute an additional $1,000 annually.

These limits include employer contributions, so make sure you know how much is being contributed in total.

Do you still have questions?

When planning for your future healthcare expenses, it’s important to understand how your HSA might pair with what you’re saving in your company’s retirement plan. To dig into the details of your personal situation, call the Shepherd Financial team at 844.975.4015.

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