You may have heard of an HSA and wondered what it was; you may even own an HSA but aren’t exactly sure how it works.
HSA stands for Health Savings Account and it allows individuals that meet certain requirements to contribute pre-tax dollars into a savings account designed to reimburse you for medical costs. When used to reimburse you for a qualified health expense, the money is paid out tax-free. In other words, the dollars go into the account pre-tax (which lowers your taxable income) and distributions are tax-free when used for qualified health expenses!
A Flexible Spending Account (FSA) is similar to an HSA, but it has a requirement to spend the account by the end of the year or you lose the balance. This “use it or lose it” feature often discourages participation in FSAs. However, HSAs don’t have that requirement!
The annual contribution limit for an HSA in 2023 is $3,850 for individuals and $7,750 for families.1 Individuals age 55 and over can contribute an additional $1,000. Contributions for the current year can be made up until the tax filing deadline the following year or when you file taxes, whichever comes first.
Be sure to use your account for qualified medical expenses. Distributions not used for these expenses can be subject to taxes and penalties. View IRS Publication 969 HERE to see if you are eligible to add an HSA to your overall financial plan!
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