Do you want to save for medical expenses and reduce your taxable income at the same time? A Health Saving Account (HSA) may be right for you. Before you sign up for an HSA, it’s important to understand that the money must only be used for HSA-qualified expenses. If you spend the money on ineligible items, then you will need to pay income tax and penalties. We cover HSA eligible expenses, including 10 expenses that you may not know about.
What is a Health Savings Account and how does it work?
A health savings account (HSA) is a savings account which can be used for health-related expenses. HSAs allow you to save pre-tax dollars for future health needs. They are often referred to as triple tax-advantaged accounts because contributions are not taxed, the money can be invested and grow tax-free, and any withdrawals for HSA-eligible expenses also aren’t taxed.
You can use your HSA to pay for qualified medical expenses for yourself, your spouse, and your eligible dependents. They can be a helpful tool when it comes to saving money for health expenses.
Why should I open an HSA?
One of the major advantages of an HSA is that it is a tax-advantaged account. You can deduct your HSA contributions from your taxable income. You can invest your HSA in mutual funds or other investment tools and let the money grow tax-free.
Am I eligible for an HSA
To be eligible for an HSA, you must:
- be enrolled in an HSA-eligible high-deductible health insurance plan (HDHP).
- have no other health coverage
- not be enrolled in Medicare
- not be a dependent on someone else’s tax return.
It is important to call your health insurance provider, to make sure your plan is HSA-eligible. Not all high-deductible health insurance plans are HSA-eligible.
10 common HSA eligible expenses that you may not know about:
- Sunscreen: Sunscreen is one of the most important items to protect your skin and to decrease the risk of skin cancer. HSA covers over the counter sunscreen of all types.
- Lip balm: If you want your lip balm to be an HSA-eligible expense without needing a note from your doctor, then you should purchase one that has a minimum SPF 15 and has broad-spectrum protection.
- Prenatal vitamins: While vitamins for general health aren’t HSA eligible, prenatal vitamins are because they help prevent birth defects and support fetal development.
- Aloe Vera: Aloe vera is a great remedy if you do suffer from a sunburn. However, in order to use your HSA, you do need a prescription from your doctor for aloe vera.
- Prescription glasses: As long as your doctor provides a prescription, then prescription glasses are an HSA-eligible expense.
- Athletic tape and wraps: You can get athletic bandages, braces, cooling and heating wraps without needing a prescription from your doctor.
- Fitness tracking device: If you believe that a fitness tracker is a medical necessity for your health, then you can get a prescription from your doctor, and a fitness tracking device will be covered.
- Tampons, pads, and other female hygiene products: All of these items are now considered an eligible HSA expense thanks to the CARES Act.
- Condoms and contraceptives: Condoms and contraceptives play an important role in preventing sexually transmitted diseases and supporting positive reproductive wellness.
- First aid: You can use your HSA savings to purchase a pre-assembled first aid kit or you can put together first aid supplies to build your own personalized first aid kit.
What expenses are not HSA eligible?
Some expenses that aren’t eligible include vitamins for general health, maternity clothes, funeral costs, childcare for healthy babies, over-the-counter medicine, and elective cosmetic procedures.
What is the maximum contribution amount for an HSA for 2023?
The maximum contribution amount for 2023 is $3,850 for individuals and up to $7,750 for families. People over 55 can contribute an extra $1,000 annually.
How can I open an HSA?
You can open one with most health insurance companies or at a financial institution.
How do I pay with my HSA?
There are three ways that you can pay with your HSA
- Use your Optum Financial payment card
- Pay out of pocket and then pay distribute funds from your HSA to reimburse yourself
- Use an online bill.
Reminder – Make sure that you save all of your receipts for your qualified medical expenses in case you are audited.
What is the benefit of having an HSA?
- Healthcare costs seem to be forever rising, especially as you get older, so it’s important to have money that you can use to cover these expenses.
- No federal income tax: An HSA can help lower your taxable income which means that you will pay less in taxes.
- No expiration date on the funds: Money in your HSA account will earn tax-free interest, and any unused funds will always roll over to the next year.
- Helps you budget for healthcare expenses: If you have money in your HSA, then you can readily use that money for qualified medical expenses whenever they arise. You could also treat it as your medical emergency fund.
- Can help you save for retirement. Once you reach 65, you can use the funds in your HSA for any purpose without a penalty.
- Possible use for spouse and dependents: Sometimes you can use your HSA to pay for qualified medical expenses for your spouse and dependents, even if your high deductible health plan doesn’t cover them.
What happens if I accidentally make a purchase that is not HSA eligible?
If you use your HSA debit card or check then the purchase will go through but you will need to pay income tax on that amount. If you’re under 65 and spend the money on an unqualified purchase then you must also pay a 20% penalty on top of the income tax. Therefore, it is very important to make sure that your purchase is eligible before completing the transaction.
Is an HSA worth it?
An HSA can be a cost-effective option for individuals and their families. As with most investments, starting an HSA at an early age can help secure your financial future.
