How Does an HSA Work? A Guide to Health Savings Accounts

A Health Savings Account (HSA) can be a game-changer when it comes to managing your healthcare expenses. Let’s break down what an HSA is, how it works, and who benefits most from having one.

What Is an HSA?

A Health Savings Account (HSA) is a personal savings account designed to help you set aside money for qualified medical expenses. The key benefits? Contributions are tax-deductible, the money grows tax-free, and withdrawals for eligible healthcare costs are also tax-free.

But there’s a catch: HSAs are only available to individuals enrolled in a high-deductible health plan (HDHP). A high-deductible health plan has lower premiums, but higher deductibles compared to traditional plans, meaning you pay more out-of-pocket before your insurance starts covering medical expenses.

Benefits of an HSA

• Account Ownership: You own your HSA account. If you switch employers, rest assured that your HSA stays with you.
• Security: Your HSA helps insulate your finances from high or unexpected medical bills.
• Flexibility in Funding: Contributions may be made by your employer, yourself, and any other person or entity (charity, etc.) up to your maximum contribution limit.
• Tax-Free Savings: Unused funds roll over into the next year or you can save them for retirement.
• Tax-free Earnings: Interest earned on the account will accrue tax-free within the HSA.*
• Tax-free Withdrawals: Funds used for qualified medical expenses will not be taxed upon withdrawal.*
• Catch-up Contributions: If you are age 55 or older you can make additional catch-up contributions.

*Subject to IRS requirements. Consult your tax advisor for more information.

How Does an HSA Work?

Here’s a step-by-step guide to how an HSA works:

1. Eligibility: To open an HSA, you must be enrolled in an HDHP and not covered by any other non-HDHP health plan. You cannot be enrolled in Medicare or claimed as a dependent on someone else’s tax return.
2. Open an HSA Account: If you’re enrolled in an HDHP, you can open an HSA account with a trusted provider like MidWestOne Bank. Your employer may also have a preferred HSA company.
3. Contribute Money: You, your employer, or both can deposit money into the account. Each year, the IRS allows contributions to your HSA up to a maximum amount for individuals and families. Check the IRS website for the most up to date information on contribution limits.
4. Earn Tax-Free Growth: Any money you contribute to your HSA grows tax-free, meaning you won’t pay taxes on interest or investment earnings.
5. Pay for Qualified Expenses: Use your HSA funds to cover eligible medical expenses like doctor visits, prescriptions, dental care, and even vision needs. You can even buy skincare items – just make sure they qualify for HSA! A comprehensive list of qualified expenses is available on the IRS website.
6. Carry It Forward: Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year after year. You never lose what you don’t use!

Who Benefits Most From an HSA?

An HSA isn’t for everyone, but it’s particularly beneficial for:

• Families Preparing for Big Expenses: HSAs can help families plan for significant medical costs, such as childbirth or surgery.
• Savvy Savers: Think of an HSA like a healthcare-focused retirement account. Once you hit 65, you can use HSA funds for non-medical expenses (though withdrawals will be taxed).

Does an HSA Have Any Restrictions?

HSA funds that are used for non-qualified medical expenses will be assessed a 20% tax penalty and will also be taxed as regular income.

Funds withdrawn after age 65 (or if you become disabled) are exempt from the 20% tax penalty— however, the funds will be subject to income tax if not used for qualified medical expenses.

Why Choose an HSA Through MidWestOne Bank?

At MidWestOne Bank, we understand how important it is to feel financially secure, especially when it comes to healthcare. That’s why we offer Health Savings Accounts that are easy to use and come with:

• Convenient Access: Manage your HSA online or with our mobile banking app. Your HSA debit card also provides immediate payment options for your medical expenses.
• Tax Advantages: Enjoy the triple tax benefits of an HSA—contributions, growth, and withdrawals for qualified expenses are all tax-free.
• Trusted Support: Our team is here to help you maximize your HSA, whether you’re just getting started or want to make the most of your savings.

Get Started Today:

• Open Individual Health Savings Account
• Open Family Health Savings Account
• View HSA Rates

Tips for Maximizing Your HSA

1. Contribute Regularly: Make consistent deposits to your HSA. Even small amounts add up over time.
2. Invest Your Balance: Many HSAs offer the option to invest your funds. This can help your savings grow faster if you don’t need the money immediately.
3. Save Your Receipts: Keep a record of your medical expenses. You can reimburse yourself years down the line, allowing your account to grow in the meantime.
4. Plan for Retirement: After age 65, you can withdraw HSA funds for non-medical expenses without penalties. It’s a smart way to boost your retirement savings.

Is an HSA Right for You?

If you’re enrolled in a high-deductible health plan, an HSA can provide both immediate and long-term financial benefits. From tax savings to peace of mind, it’s a versatile tool that helps you take control of your healthcare expenses.

At MidWestOne Bank, we’re here to make it easy for you to save smarter and manage your health expenses confidently. Ready to open your HSA? Visit our website or stop by your nearest branch to get started.

Secure your health, secure your finances—start your HSA journey with MidWestOne Bank today!

MidWestOne Bank does not offer tax advice, this blog is for informational purposes only.