What Is An HSA?

by | | Retirement, Taxes

HSA

What is an HSA? A Health Savings Account (HSA) is a powerful tool to save on medical expenses. You deduct your contributions on your tax return, and pay medical expenses tax-free.

Background

HSAs were first available way back in 2004. They were little-used for many years, for two reasons.

  • They were new, and few people had heard of them. Change is hard!
  • To use an HSA, you must have a high-deductible health plan. With the continued rise in healthcare costs, high-deductible plans have gained more attention because they have lower premiums.

How an HSA works

You get a tax deduction for contributions to an HSA. The max is $3,650 for self-only coverage, or $7,300 for family coverage (2022).

You get this deduction no matter how high your income is.  This is great for an ER doc family in a high tax bracket. A $7,300 deduction saves you $2,920 in tax, assuming a 40% combined federal + state marginal tax rate!

Then, you can use the HSA to pay qualified medical expenses tax-free.

Sounds great so far, right? Not so fast. You must qualify to use an HSA.

Who can use an HSA

To contribute to an HSA, you must have a qualifying high-deductible health plan (HDHP). Your health insurance provider should clearly point out which plan choices are HSA-eligible. Trust us, this is easier than figuring it out on your own!

Should you choose an HSA-eligible health plan?

HSAs are a powerful tax-saving tool, and what ER doc household isn’t looking to save tax? In fact, HSAs are even more powerful when you leave them alone now and use them for retirement instead.

The power of an HSA means you should strongly consider choosing an HSA-eligible health plan. But always choose the best health plan for your family’s needs. Here are two common considerations.

Current cost

An HSA-eligible plan has lower premiums, but this comes with a higher deductible and higher max out-of-pocket cost. If your family expects to use a lot of healthcare services, you may save enough money with a non-HSA-eligible plan to make skipping the HSA worth it.

Peace of mind

An HSA-eligible plan requires a mindset shift. Many people are used to a modest copay for office visits and prescriptions. With an HSA-eligible plan, you pay the full freight until you hit the deductible, then a portion up to your max out-of-pocket.

This can be stressful for HSA newbies. You can overcome this by planning for current costs and understanding the long-term power of your HSA!

To discuss adding an HSA to your financial toolkit, schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.

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