What is an HSA and how do they work?

Posted on October 20, 2021

This is the second post in our “Healthcare Mini Series”.

When it comes to tax planning around your healthcare, a health savings account or HSA is going to be a key part you’ll want to consider.

What Is a Health Savings Account (HSA)?

An HSA is essentially a savings account that allows you to contribute money to it, pre-tax, to pay for qualified medical expenses. However, unlike a flexible spending account (FSA) it is not a use it or lose it, funds roll over year to year.

What Are the Benefits of an HSA?

An HSA is a super powerful tool because of these benefits:

  • You get a tax deduction for the funds you contribute into an HSA.
  • Withdrawals are tax free if used for qualified medical expenses. 
  • Interest or earnings with-in the HSA are NOT taxed.
  • Traditionally in order to get a tax benefit from out of pocket health costs you would need to itemize deductions and have a pretty large amount of costs. However, with an HSA you get a tax deduction on your contributions so its a great way to get the benefit without having to hit the high costs.
  • This is not a use it or lose it account. The contributions remain in the account until you use them and you can invest and grow that account tax free. Many people choose to self-direct their HSA account.
  • You can invest funds within an HSA in things like mutual funds, stocks, rental properties, other assets, etc. It does not have to just grow at a small savings interest rate.
  • An HSA is “portable” which just means if you change employers it does not matter, the account sticks with you.

It is a rare tool that the IRS lets you “win” on both ends, the contribution and the withdrawal. For this reason we recommend everyone (business owner or not) be maxing out their HSA contributions, if they qualify and can afford it.

What Are The 2021 HSA Contribution Limits?

  • Self Only: $3,600
  • Family: $7,200
  • Age 55 or Older? Additional $1,000 Allowed

How Am I Eligible to Contribute To An HSA?

In order to qualify to contribute to an HSA plan you must meet a few qualifications:

  1. Covered by a high deductible health insurance plan (HDHP)
    • Deductible of at least $1,400 (Single) or $2,800 (Family) for 2021
  2. Not covered by any other plan that is not a HDHP
  3. Not eligible for Medicare
  4. Not claimed as a dependent on someone else’s return

What Else Should I Consider When Thinking About An HSA?

  • One of the only tools we can get a deduction going in and we can withdrawal tax free. Even if you are healthy and do not think you’ll use the funds, some day you will. Take advantage of this great opportunity in the tax code!
  • Many people look at an HSA as a savings vehicle because there is no tax on the interest or gains earned within it and you know at some point you’ll need funds for medical expenses.
  • There are a lot of things that would qualify as an allowed medical cost including: prescription meds, co-pays, over the counter meds, first aid supplies, home health care items and so much more.
    • If you really want to get an idea of what may qualify, check out the HSA Store which has over 4,000+ HSA eligible products. Use that link above and get $20 off your first order of $200+!
    • Here is another HSA eligibility list.
  • If you withdrawal money from an HSA for non medical expenses you’ll face a 20% penalty plus taxes so we would not recommend this but know that it is an available option.
    • Note: If over age 59 and a half there is the possibility to withdrawn for non medical expenses and simply pay taxes on it, avoiding the penalty.

    Related Posts:

    What year-end tax strategies are available to business owners?

    What year-end tax strategies are available to business owners?

    Before you know it 12/31/21 will be gone and we will be onto 2022. One thing we talk about often is that once the clocks turns to 1/1 a vast majority of tax strategies are no longer available. Today we are going to go through some of the top strategies you want to be...

    You may also like:

    The result?
    You’ll love how easy managing your business finances becomes!

    Download your FREE copy of this eBook to see if you’re overpaying uncle Sam by 5 or 6 figures annually