In 2004, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act. With the new law came a new type of bank account called the Health Savings Account, or as it’s commonly referred to now, the HSA. While it can be a very powerful financial and medical tool, it is estimated that only 1 in 10 Americans use HSAs and take advantage of their benefits.
Individuals that are covered under a High Deductible Healthcare Plan (HDHP), can use an HSA as a complimentary component to their coverage. You can read the IRS guidelines on HSAs here. The primary benefit of an HSA is the tax savings feature that it provides for its account holders. The tax code that governs the use of the HSA (IRS Section 223) allows its users to pay for certain health and medical expenses with pretax dollars that come directly out of their paychecks.
The amount of savings that any individual receives varies based on their personal tax bracket. For example, the IRS allows an individual to contribute up to $4150 in 2024 to their HSA. If a person in a 24% tax bracket (earning $83K to $178K) were to take full advantage of the pretax benefits of their HSA, they would see a savings of $996 in 2024.
Furthermore, funds in an HSA grow tax-free. Unlike a traditional savings account where interest earnings are taxed, the growth of your HSA balance isn’t subject to taxes as long as the funds are used for qualified medical expenses. This tax-free growth allows your money to compound over time, increasing your savings potential.
Using an HSA wisely for qualified medical expenses can also save you money in the long run. Because they are designed to cover medical costs, using these funds for expenses such as doctor’s visits, prescription medications, dental care, and vision care can reduce your out-of-pocket spending. Additionally, some HSA providers offer investment options, allowing you to grow your HSA funds even further through market returns.
Another advantage of an HSA is its portability. Unlike flexible spending accounts (FSAs) that may have a “use it or lose it” rule at the end of the year, HSA funds rollover from year to year. This means you can build a significant balance over time, providing a financial safety net for future medical needs. Whether you change jobs, switch health insurance plans, or retire, your HSA remains with you, offering continued savings potential.
Moreover, HSA funds can be used for non-medical expenses penalty-free once you reach age 65. While withdrawals for non-qualified expenses are subject to income tax, the 20%penalty typically associated with early withdrawals no longer applies. This flexibility makes an HSA a valuable retirement savings tool, supplementing other retirement accounts like 401(k)s and IRAs.
Because of the unique physical fitness and cognitive health benefits associated with a program at Activate Brain and Body, many of our members are able to take advantage of the pretax savings that HSAs can provide. If you have an HSA and you are interested in finding out if you’re eligible to take advantage of those pretax savings, reach out to Mike Gelfgot or Adam Ortman at Activate Brain and Body (513-793-2724).