It's no secret that discussing different financial accounts sounds a bit like alphabet soup. Take HSAs for example. When people start talking about Health Savings Accounts, you hear HSA, HDHP, and IRS.
It's easy to get overwhelmed quickly!
Fear not. We've sorted through the essential information (and acronyms!) about Health Savings Accounts and captured answers to some of the most commonly asked questions, like “What exactly is covered in an HSA?” and “Can I use my HSA for my spouse?”
Read on to learn more about HSA basics and some of the other benefits that people may qualify for with these accounts.
A Health Savings Account (HSA) is a spending account you can use to cover certain health-related expenses.
HSAs can also offer up some huge benefits in certain situations. However, not everyone qualifies for an HSA. As a result, there are often a lot of questions about who can have one and what these accounts do.
We dug into HSAs so you don't have to! Here are answers to some of the most frequently asked questions about Health Savings Accounts:
Are HSAs and FSAs the Same?
Nope! HSAs and FSAs are not the same thing. They're commonly confused, though. That's that alphabet soup we mentioned!
One of the most significant differences between the accounts is that FSAs are “use it or lose it” accounts. That means that you have to spend the money you contribute within a certain time frame or it's gone.
The balance in your HSA, however, continues to grow indefinitely. That's actually part of what makes an HSA so powerful. More on this in a bit!
Who is Covered With an HSA?
You may think that an HSA is only for the account holder. That's not true. In fact, an HSA can cover several different people, including:
- Your spouse
- Any eligible dependents
Who are eligible dependents? They include your children, of course. More so, eligible dependents can also be siblings or parents in certain situations as well.
Can I Use My HSA for My Spouse?
Yes! Your HSA can be used to cover your spouse. It gets even better. Your spouse does not have to have an HSA or even an HDHP. As long as you qualify for an HSA, you can use it for your spouse.
There is one thing to note, however. You can't use the funds in your HSA to cover medical expenses your spouse incurred before you were married even if you had the account.
What is Covered With an HSA?
Now that you know who is covered by an HSA, let's talk about what is covered. If you've done any research on HSAs, there's a good chance you've stumbled across the phrase “qualified medical expense”. But what does that actually mean?
Your HSA can be used in a variety of situations. Some people initially hesitate to fund their HSAs, unsure if they will actually come across expenses that count.
You can use your HSA to pay for:
- (Many) medications and pharmacy items
- Hospital services
- Diagnostic services
- Long-term care
You can also use your HSA to cover vision, dental, and even chiropractic care.
It's also always a good idea to refer to the IRS directly for more detailed information. After all, no one is going to better understand a qualified medical expense than the IRS!
What Makes an HSA so great?
Now that you understand the basics of an HSA, let's talk about what's to love about them. There are two standout reasons why people set up health savings accounts. They may offer excellent tax benefits. More so, HSAs can also offer a huge helping hand with your investment strategy.
Let's take a closer look at what makes an HSA so great.
HSA Tax Benefits
An HSA can be a triple tax-advantaged account. But what in the world does that mean? You might qualify for three different tax benefits by using an HSA:
- Initial funds. When you fund your HSA, you typically use payroll contributions. That means money is sent to your HSA with money that hasn't been–and won't be!–taxed.
- Interest and gains. In addition to using pre-tax dollars to fund your HSA, your earnings are also not taxed. So if your account grows through interest or even investment gains, you still don't pay taxes.
- Spending. Finally, you also won't pay taxes when you go to use the money in your HSA, as long as you use the money on qualified medical expenses.
The initial funds, earnings, and spending are all tax-free, which is how the HSA gets that triple tax-advantaged name. Of course, to make sure you qualify for these tax benefits, you might want to consult a tax expert.
HSA Investment Strategy
HSAs can be triple-tax advantaged, and that's not the only perk. Your HSA doesn't just have to help cover medical expenses. It can, in fact, pull double duty as a retirement account thanks to this HSA investment strategy.
Like your 401k, HSAs sometimes come with employer matching contributions. You will want to make sure that you're taking full advantage of their match.
Then, you'll want to set up a plan to decide which retirement account to fund first: a 401k or HSA. Eventually, you will want to max out your HSA.
Of course, you have to adhere to the IRS contribution limits. For 2022, you can contribute $3,650 for self-only or $7,300 for family coverage. As you inch closer to your golden years, you can even add extra money thanks to a catch-up provision.
As you make these yearly contributions, compound interest is going to do the heavy lifting for your money. To maximize your account growth, don't spend your money unless you absolutely have to.
And of course, make sure you only use it to cover medical expenses. Why? Letting your account balance grow for years or decades helps you scoop up more compound interest. Plus, your account transforms when you turn 65. At the age of 65, you can actually use the money in your account for anything, not just medical expenses. It's taxed like ordinary income, but that tax hit is often worth it.
The Most Important HSA Investment Strategy Step
If you intend to use your HSA as a supplement to your retirement savings, it can complement your current investing strategy. Granted, you'll have to make sure you actually invest!
Only a very small percentage of HSAs are currently invested. Instead, most people add money to the account without investing the money in anything. To make this a long-term investment strategy, you'll want to invest the funds wisely. As with any investment, you want to pay attention to fund options and fees.
To invest your HSA, you will work with a financial institution that manages HSAs. These institutions are called HSA administrators. Different administrators have different investing fund options and minimums. Some companies, like Starship HSA, offer accounts with no hidden fees and automated investing to streamline your investment strategy and maximize your money.
Am I Eligible for an HSA?
With all the benefits of HSAs, you might be ready to rush out and open one. In fact, you're likely wondering why everyone doesn't have an HSA. It's because not everyone qualifies for a Health Savings Account.
In order to open an HSA, you first have to qualify under the eligibility requirements set by the IRS.
You are eligible for an HSA if you…
- Are at least 18 years old,
- Have a high-deductible health plan (HDHP),
- Do not have any other insurance coverage that is not an HDHP, and
- Are not enrolled in Medicare.
Additionally, if someone else claims you as a dependent at tax time, you are ineligible for an HSA.
What about people who are pursuing life as digital nomads or living as ex-pats? It turns out, they might qualify for HSAs as well! If you are a US citizen and paid in US dollars, you should be eligible.
For more details about who is eligible for HSAs, you can check with the IRS.
Do HSA Rollovers Count as Contributions?
HSAs have yearly contribution limits. There is an individual and a family contribution limit. However, if you roll money over from an old HSA into your new one, that rollover does not count as part of your yearly contribution.
Can I Get an HSA if My Employer Doesn't Have One?
So you're sold on an HSA. You are ready to take advantage of the tax benefits and you think it fits your investment strategy. What happens if your employer doesn't offer an HSA? Can you still open one? Absolutely.
The HSA is your account, not your employer's. But you do have to make sure that you qualify. The same eligibility rules apply whether you get an HSA through your job or not.
Whose Expenses Does My HSA Cover?
You should be able to use funds from your HSA to cover your spouse provided that they are HSA-qualified expenses. This is true whether or not your spouse has an HSA.
HSA funds can be used for your own expenses, your spouse's expenses, and even dependent children. Remember that the IRS views married couples as a single tax unit. Since you and your spouse share an HSA contribution limit, it makes sense then that you can use either HSA to cover your spouse's expenses.
Of course, if you aren't sure, you want to consult a tax expert!
Avoiding Common HSA Mistakes
These are some common HSA mistakes you want to avoid.
Can my spouse and I contribute to the same HSA?
Sometimes, we find a really good thing in finances and want to go all in. In this case, many times, a couple tries to have both spouses fund a single HSA. That's a big no-no, according to the IRS. Currently, you and your spouse can both contribute to HSAs. However, these payroll deductions cannot both fund the same single HSA account.
What if I withdraw money but the expense isn't HSA qualified?
Sometimes, people will take money out of the HSA only to discover they used the money to pay for something that isn't HSA qualified. Thankfully, the IRS gives you a little bit of breathing room. You have until tax time (early to mid April) to repay the money. If you don't, that withdrawal gets reported as earned income. Plus, you'll get hit with a 20% penalty. Ouch!
Final Thoughts on Using My HSA for My Spouse and Other HSA Questions
A Health Savings Account (HSA) can be a financial secret weapon. Many times, your account enjoys a triple tax boost and can even transform into a retirement supplement when you reach your golden years.
The trick is to make sure you qualify for an HSA! That means you have a high-deductible health plan (HDHP) and meet the other eligibility requirements.
If you do qualify, check out more information about HSAs with Starship HSA to see if this account should be part of your financial future.
What other HSA questions do you have? Are you investing with your HSA currently?
Please let us know in the comments below.