2020 Guide to Using an HSA for Savings, Tax Breaks, and More

One of my favorite tax-advantaged savings accounts is a health savings account or HSA. Not only does an HSA allow you to pay less tax for a wide variety of allowable medical expenses, but you can spend it any way you like in retirement. It’s a legal way to pay less tax and save more for the future.

But having an HSA comes with strict rules for saving and spending the funds. This post will cover how to use an HSA wisely, seven significant benefits they offer, and updates on new (and often surprising) allowable expenses in 2020.

What is a health savings account (HSA)?

An HSA is a tax-exempt account for the sole purpose of paying allowable medical expenses. But to qualify for one, you must first have a particular type of health insurance, which I’ll cover in a moment.

It’s a legal way to pay less tax and save more for the future.

You can contribute to an HSA if you get health insurance as an individual or through a group plan. You always own and manage an HSA as an individual, and there are no income limits to qualify.

You don’t need permission from an employer or the IRS to set up an HSA, and it stays with you even if you change jobs or become unemployed. Even if you lose your insurance, you can continue spending your HSA balance; however, you may not be eligible to make any new contributions to the account.

The beauty of an HSA is that contributions are deductible on your tax return even if you don’t itemize deductions. The funds can earn interest or be invested for potential growth in a menu of available options, such as mutual funds. And when you take distributions to pay for qualified medical expenses, your original contributions plus any earnings are entirely tax-free.

Contributions to an HSA can come from you, someone else, or an employer.

Contributions to an HSA can come from you, someone else, or an employer. Some company benefits include regular deposits into an HSA, such as $150 a quarter. Like with matching funds for a retirement plan (such as 401k or 403b), HSA contributions from an employer are not included in your taxable income, a fantastic benefit!

Depending on your income tax rate, using an HSA to pay for allowable medical expenses means getting about a 20% to 30% discount. Over your lifetime, that can add up to huge savings!

However, similar to a retirement account, you should never put money in an HSA that you might need for everyday expenses. You can only use HSA funds to pay for...

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