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The hidden value of a Health Savings Account (HSA)

Home BlogThe hidden value of a Health Savings Account (HSA)

Key takeaways

  • Health savings accounts can help you save for retirement.
  • Although its primary purpose is to pay for qualified medical expenses, an HSA is like a 401(k) or IRA.
  • An HSA comes with three key tax advantages.

A Health Savings Account (HSA) is a handy tool for paying for qualified medical expenses, but many people don’t know it can also be an important retirement savings tool.

Here’s how HSAs typically work – each paycheck, a portion of your pretax dollars are directed into your HSA. The money you’ve deposited in your HSA can be used tax-free when you have approved medical expenses or doctor’s visits.  

While this is a valuable tool, HSAs also have valuable long-term investment potential. You can hold unused dollars in your account for years. Plus, the money in the account can be invested in mutual funds, giving it a chance to grow tax-free over time.

Let’s take a closer look at how it works.

The basics

To be eligible to open an HSA, you must:

  • Have a specific type of health insurance called a high-deductible health plan (HDHP).
  • Not be enrolled in Medicare or claimed as a dependent on someone else’s tax return or traditional health insurance plan.
  • Only have the HDHP coverage unless permitted by the federal government.

Your place of employment may line up an HSA provider for your HDHP. If it doesn’t, you can open an account through MidWestOne Bank or other providers.

How to use an HSA for retirement

HSA are appealing for retirement savings because they offer triple tax-free advantages for long-term investing: no taxes on contributions, earnings or withdrawals.

  • Contributions can be made via payroll deductions on a pre-tax basis, which means they reduce your federal and state income tax liability. You’re also able to contribute your own funds – up to the annual contribution limits (see below) – which are also tax-deductible.
  • Your account balance will grow tax-free. Any interest, dividends or capital gains you earn are nontaxable.
  • Withdrawals for qualified medical expenses are tax-free. This is a key differentiator to traditional retirement savings tools like 401(k)s or IRAs. When you withdraw funds from those tools, you pay income tax on withdrawals, regardless of how the funds are being used. With IRAs and 401(k)s, you also must be a certain age to withdraw money, which is not the case for HSAs.

Beware, there is a hefty 20 percent tax for using HSA funds for something other than qualified medical expenses before age 65. For those older than age 65, you can make penalty-free withdrawals.

Using your HSA

Because HSAs offer considerable tax benefits, there are limits to the amount you can contribute to the account each year. In 2019, you can contribute up to $3,500 if you have coverage for yourself only. The contribution limit for family plans is $7,000. If you are age 55 or older, your contribution limit is increased by $1,000. 

From there, you can use the money in your HSA for qualified out-of-pocket medical expenses such as your deductible and co-payments for doctor visits. You can also use it for prescription drugs, vision or dental care that may not be covered by your insurance.

Additionally, you don’t have to use the money by the end of the year, so it can grow tax-deferred in your account for later use. You can also reimburse yourself later for current medical costs if you have records of your bills.

Start your HSA at MidWestOne

MidWestOne’s HSA comes with a Mastercard® debit card that can be used at the point-of-purchase or point-of-care to pay directly for medical products or services. This is easier than filling out disbursement or reimbursement forms, which some older HSAs require. Additionally, MidWestOne’s HSA can be accessed directly through the bank’s online and mobile banking platforms, which makes it easy to monitor your account and adjust as needed.

If you have questions regarding opening an HSA, the MidWestOne team is happy to help. Stop in to see us at any of our locations.

Learn more about MidWestOne’s HSA.  

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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