If Benjamin Franklin were alive today, his famous quote Nothing is certain, except death and taxes might include a third item — paying medical expenses. Fortunately a health savings account (HSA) is a great way to cut your spending on medical expenses.
A major tax break
If you have a high deductible health insurance plan (a plan with a deductible of at least $1,500 for an individual or $3,000 for a family), you can add an HSA to pay for medical expenses with pre-tax income. Contributions to an HSA can be made via payroll deduction or directly to the account and deducted as an adjustment on your tax return. This approach effectively reduces your medical bills by as much as 37 percent!
Tips to maximize your HSA
Once your HSA is established, here are four ideas you can use to take full advantage of this tax-savings vehicle:
- Maximize your HSA contributions every year. Set a goal to contribute the full amount allowable by the IRS into your HSA each year. Unlike other funds, unused balances can remain in the account, giving you a great way to build up a nice emergency fund over the years. The 2023 total contribution limits are $3,850 for single taxpayers and $7,750 for a family (add $1,000 if you are 55 or older). You have until April 15 of the next year to make contributions, but when figuring out how much to contribute, remember to include contributions by your employer in your total.
- Pay for medical expenses with your HSA. Typically you can pay for medical expenses directly from your HSA account via a debit card. If not, track all payments you make for medical expenses and take matching distributions from your HSA. If you don’t have enough in your HSA to cover an expense, make a contribution to your HSA first and then pay the bill. Keep ALL your medical bills and receipts to prove that the distributions are for qualified medical expenses.
- Prioritize HSA contributions. HSA contributions are tax-deductible and distributions are tax-free (for qualified medical expenses). Traditional IRA distributions, on the other hand, are taxable. So it often makes sense to maximize HSA contributions over Traditional IRA contributions.
- Look at every year as an opportunity. Remember, each year has an HSA contribution limit. If you do not maximize that year’s opportunity, it is gone. So try to find a way to make pre-tax contributions to your HSA up to the annual limit. Most of us will need money for medical, dental, or vision expenses and wouldn’t it be nice to do this with pre-tax money?
So knowing you will always have medical expenses, prioritize your HSA contributions to take advantage of its additional tax benefits.