If you aren't sure whether your plan qualifies, check with your benefits administrator or plan provider. This health plan does not have to be provided by your employer but it must meet the requirements outlined above. To open and contribute to an HSA, you'll need to be enrolled in an HSA eligible health plan. Step 1: Make sure you are eligible to open an HSA This can provide versatility in retirement income planning. Unlike 401(k)s and traditional IRAs, which require you start minimum withdrawals called RMDs when you turn 73 3, you'll never be required to take any funds out of your HSA. HSAs are not subject to required minimum distributions ( RMDs) It's important to note that before you turn 65, you'll face a 20% penalty-plus any applicable taxes-on withdrawals used not used for qualified medical expenses. You will have to pay income tax, though, similar to making withdrawals from other retirement savings vehicles, like traditional 401(k)s or IRAs. Starting at age 65, there is no penalty if you use HSA money for non-qualified medical expenses You can only open a limited-purpose FSA if your employer allows for it, however. That can help you have the best of both worlds: using an HSA to save for future medical expenses while you finance some current ones with an FSA. The truth: HSA holders can have a limited-purpose FSA to pay for qualified expenses associated with dental and vision care. You can still have an FSA to address certain immediate qualified medical expenses Some people have one for investing, and another for cash to pay medical expenses. It's also possible to have multiple HSAs. You can even open an HSA if you're in an HSA-eligible health plan and your employer does not provide one-or if they do but you prefer a third-party option. So when you leave a job, you keep all of the money you've saved up in your HSA and can transfer into a new HSA or employer-sponsored HSA at your next job. Unlike health care FSAs, which your employer technically owns, your HSA belongs to you. Your HSA is your account, not your employer's Over 30 years of contributing and investing the maximum family contribution, you could end up with almost $1 million, assuming a 7% rate of return. Combined with the ability to invest funds, this allows your health savings to benefit from compounding returns. This means you don't forfeit any money you don't use in a given year, and you can carry it forward until you reach a time that you want or need to use the money in your HSA. HSAs are not subject to "use-it-or-lose-it" rules
According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2022 may need approximately $315,000 saved (after-tax) to cover health care expenses in retirement.
#Hsa qualified expenses free#
You won't get to deduct from your taxes what your employer contributes, but you will be getting free money that can grow over time if it's invested.īy investing at least a portion of your HSA funds, you can potentially build up your medical spending nest egg, which can be especially valuable later in life. 1 Think of it like a 401(k) match for your health. Your employer may make contributions to your HSAĪlmost 80% of employers help employees pay for medical expenses through contributions to their HSAs. Only contributions made with payroll deduction avoid Medicare and Social Security taxes. But it's important to keep in mind, contributing via payroll deductions will lead to the most tax savings. That helps increase the amount of money you have for medical spending. HSA tax deductions can have powerful benefits: For instance, someone in the 22% federal income tax bracket could potentially save nearly 30% in taxes (federal income + FICA + potentially state income) on every dollar contributed to the HSA. If you fund your HSA with after-tax dollars instead, you may be able to take a tax deduction on your personal taxes when you file. HSA contributions are typically made with pre-tax income from your paychecks, similar to the way 401(k) contributions are set up. You can deduct your contributions from your taxes Here's more about what you need to know about the financial advantages of HSAs.
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