ABCs of HSAs for 2023

Key Takeaways

• Health Savings Accounts or HSAs are a tax-advantaged vehicle to save for qualified medical expenses for investors with high-deductible health plans.
• HSAs participants have annual contribution limits, but unlike a flexible spending account, there are no limits on how much can be rolled over annually.
• HSAs have a "triple tax advantage" so the tax benefits of an HSA outweigh what is offered by other tax advantage vehicles such as a 401(k), a traditional IRA, a Roth IRA, and a 529 college-savings plan.

Megan Pacholok: As open-enrollment season approaches, you may be considering a high-deductible healthcare plan with a health savings account or, as they are more commonly known as, an HSA. Well, what is a high-deductible plan? How can you use your HSA? What are the benefits and the limitations? And what is the "triple tax advantage" everyone talks about with HSAs?

Let's take a look. What Is an HSA?

A high-deductible health plan is a type of health insurance that offers lower premiums in exchange for higher deductibles compared to other types of healthcare plans.

A health savings account, or HSA, is a tax-advantaged vehicle to save for qualified medical expenses. They are made available to people enrolled in high-deductible healthcare plans.

Of course, there are some conditions to qualify for an HSA and some limits to keep in mind:

First, to qualify for an HSA, your high-deductible healthcare plan must have a deductible of at least $1,500 for an individual coverage or $3,000 for family coverage.

The high-deductible health plan's annual out-of-pocket expenses, including deductibles but not premiums, cannot exceed $7,500 for self-coverage and $15,000 for family coverage. Maximum HSA Contribution Limit for 2023

Finally, HSA participants have annual contribution limits. Those covered by an individual plan can contribute up to $3,850, while those covered in a family plan can contribute up to $7,750.

Note: If offered, employer contributions do count toward these maximums. Also, individuals over the age of 55 can save an additional $1,000 each year.

Unlike a flexible spending account, there is no limit as to how much money can be rolled over from year to year in an HSA, providing the opportunity for accountholders to accumulate significant HSA assets. How Does the Triple Tax Advantage Work?

As for the “triple tax advantage” that HSAs offer? That means that HSA contributions go in tax-free, money grows tax-free, and then can be withdrawn tax-free as long as it is spent on qualified medical expenditures.

As a result, the tax benefits of an HSA outweigh what is offered by other tax-advantaged vehicles such as a 401(k), a traditional IRA, a Roth IRA, and a 529 college-savings plan.

It is important to remember that funds withdrawn for nonhealthcare expenses are taxed at the accountholder's marginal tax rate. And if HSA dollars are withdrawn before the age of 65, the funds are subject to an additional 20% penalty. What Happens to Your HSA After Leaving Your Job?

Well, what happens to your HSA if you leave your job? Well, HSAs are tied to the accountholder and are independent of the workplace, though workers must be currently enrolled in a high-deductible health plan in order to contribute to one. Thus, workers can open and maintain an HSA outside of their employer-provided one if it better fits their financial goals.

That’s our quick look at HSAs. Of course, whether or not it will work is up to you.

Watch You're Using Your HSA All Wrong from Leo Acheson, CFA, and Susan Dziubinski. For more from Megan Pacholok read New 401(k) Lawsuits Go Too Far.