You can also contribute to your HSA with after-tax money, deducting the amount from your gross income on your federal tax return, thus reducing your tax bill. Non-account holders can also contribute to your HSA. In all cases, certain limits apply to the amount you are allowed to contribute. For instance, in 2020, the limit was $3,550 for individuals and $7,100 for families, though taxpayers 55 and older could add an additional $1,000.
The IRS details eligible expenses that an HSA covers in IRS Publication 502, Medical and Dental Expenses. Withdrawals that you make from an HSA are exempt from federal taxes and in many cases state taxes, too, if you use them to pay for qualified medical expenses. You can also use your HSA as an investment account, providing you with the potential to increase your returns. However, this carries a risk of loss, too. Money that is left over in your HSA at the end of the year rolls over to the following year. Additionally, the money remains available if you retire, switch health insurance plans, or start a new job.
HSAs require that you have a high-deductible health plan, which has the potential to create a more
substantial financial burden than plans with lower deductibles. Additionally, some HSAs charge recurring maintenance or per-transaction fees.
Flexible Spending Account
Flexible Spending Accounts (FSAs) offer many similarities to HSAs, though they are available only through employers — self- employed individuals cannot open an FSA account. Like an HSA, an FSA carries maximum contribution limits each year — $2,750 in 2021 — an amount that is deducted from your pre-tax income. This reduces your tax liability at the end of the year, though the true financial benefit will depend on whether you use the entirety of your FSA funds, which don’t all carry over, unlike those in an HSA. You can use your FSA funds to pay for medical expenses for you, your spouse, or dependents, as well as for adult children who are 26 and under. You can use an FSA to pay for medical equipment, prescription medicine, birth control, mental health treatment, and even bandages. Your employer can offer one of two options that relate to unused FSA funds. You can either carry over up to $500 to the next calendar year or receive an additional 2.5 months in the next calendar year to spend your leftover funds. To decide whether an HSA or FSA is right for you, consult with a tax or financial professional who can help you understand the advantages and disadvantages for your unique circumstances.
All investing involves risk including loss of principal . No strategy assures success or protects against loss. Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through InVestra Financial Services, a registered investment advisor and separate entity from LPL Financial. LPL Financial and InVestra Financial Services do not offer tax or legal services.
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