An HSA is a tax-advantaged account that lets you set aside money for out-of-pocket medical expenses. To qualify for an HSA, you’ll need to be enrolled in a high-deductible health plan. If your plan has a deductible of at least $1,400 for an individual or $2,800 for a family, it’s considered an HDHP. If you qualify for an HSA and leverage it the right way, it can help you build wealth over the long term. HSAs have a unique triple tax advantage:
✔ Contributions can be made pre-tax or are tax deductible asthe funds grow tax-free.
✔ They can be withdrawn tax-free to cover qualifying medical expenses.
✔ Plus, unlike a flexible spending account, any unused HSA funds automatically roll over year to year, letting you accumulate a balance over time.
HSA funds are set up as a savings account. But as with a retirement account, HSA money can be invested in mutual funds and other assets. In 2022, you'll be able to stash away more money in an HSA tax-free.
☑ Individuals with self-only coverage will be able to save up to $3,650 in an HSA in 2022.
☑ Those with family coverage will be able to save $7,300, an increase of $100 from 2021.
HSAs offer catch-up contributions for account holders who are age 55 or older, letting them contribute an extra $1,000 per year. (Once you’ve enrolled in Medicare, you can no longer contribute to an HSA.)
Some employers offer an HSA match, which could help you set aside even more. If your employer is contributing money towards your HSA, it’s counted towards that annual maximum limit set forth by the IRS.
If you withdraw HSA funds before you’re 65 for nonmedical expenses, you’ll pay income taxes on the withdrawal plus a 20% penalty. But once you reach age 65, or if you become disabled, you can withdraw HSA funds without penalty, for any reason. The amount you withdraw for nonmedical expenses is taxable as ordinary income, however. If your current health-care costs are low and you’re contributing more to your HSA than you use each year, you can turn your HSA into a long-term investment vehicle for future medical costs.