A Health Savings Account (HSA) is a nest egg of pre-taxed funds. They are not stand-alone insurance plans. They work with policies that have a high deductible, such as HMOs. You will set up your HSA through your employer.
Your job will deduct the amount you choose from your paycheck to place in an HSA. Your contributions are tax-deductible. If you are self-employed, you just need an HSA-compatible health plan. As a sole proprietor, you can deduct some of your contributions from your personal income.
You can get an HSA to help you pay for your portion of costs from a high deductible health insurance plan.
When you need to pay for copayments or coinsurance, you use the funds from your HSA instead of your personal account. For example, you can use the money in your HSA to pay for out-of-pocket costs from your HMO or EPO.
You may also be able to use HSA funds in order to pay for approved goods and services at places like pharmacies.
In addition to HSA contributions being tax-deductible and withdrawals being tax-free, any interest you earn is also tax-deferred. An HSA might be a good option if you or your family has a lot of out-of-pocket costs from your high-deductible insurance plan.
There are limits to how much you can contribute to your HSA. As of 2023, you can contribute:
- Up to $3,850 for only yourself.
- Up to $7,750 for family coverage.
You do not need to use all of your funds in one year. Funds in your HSA account roll over from year to year. This means you may grow a large nest egg for big medical emergencies while gaining interest.