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How to Open an HSA: 2022 SmartAsset Guide

A health savings account (HSA) allows you to set aside pre-tax money for qualified healthcare expenses. You can set up an HSA account with a bank, investment firm or other qualified financial institution. Many employers also offer access to HSA programs as part of their benefits packages. Here’s what you need to know to open an HSA in 2022. If you want to boost your savings to pay for health costs in retirement, a financial advisor can help you create a financial plan for your needs.

What Is an HSA?

A health savings account allows you to set pre-tax money aside in a dedicated account to pay for healthcare spending.

“Pre-tax” means one of two things: If your employer runs this account up for you, then they will reduce your taxable income in the same way that they do with a 401(k). You won’t pay withholding taxes on the money that gets deposited. If you run this account yourself, then you can take the contributions as a deduction when you file your taxes in April. This is an above the line deduction, so you can take it even if you claim the standard deduction.

As an example, if you made $50,000 and contributed $3,000 to your HSA, you would only pay taxes on $47,000 of income. This would either be reflected in your weekly withholding or your year-end taxes, depending on whether your employer or you made the contributions.

You can use the money in a health savings account for any qualifying healthcare expense. This generally includes out of pocket costs like deductibles and copayments. As long as you use this money for a qualified expense, you can withdraw it tax free. In this way it works as a combined IRA/401(k) and a Roth IRA. You don’t pay taxes on the money you contribute and you don’t pay taxes on the money you withdraw (including all of the account’s gains).

If you withdraw money from your HSA and don’t spend it on qualifying medical expenses, you have to pay ordinary income taxes on all of it. If you’re under the age of 65, you also need to pay an additional 20% penalty. For this reason many people see these as a retirement vehicle. If you’re over retirement age, an HSA works the same as an IRA or 401(k) in that you contributed to the account with pre-tax money and then pay taxes upon withdrawal.

What Is the Structure of an HSA?

An HSA can be just about any financial account set up by a qualified financial institution so long as it’s dedicated to that purpose. You cannot commingle funds.

This means that you can use a checking or savings account for an HSA if you want, and if you have a bank that will set that account up for you. However, most people use investment portfolios for their health savings accounts. As stated earlier, in this way a health savings account mirrors the structure of a 401(k) or an IRA.

By using a portfolio for your HSA, you can let your money grow more than it would in an ordinary savings account. Depending on how long your account grows before you need the money, it can potentially grow significantly. That can be a real asset when larger healthcare bills come along.

Each year, the IRS allows you to contribute a maximum amount to your health savings account. In 2022, that cap is $3,650 for individuals with an insurance plan that covers only themselves and $7,000 for households with family healthcare coverage.

3 Common Ways to Open an HSA

How to Open an HSA: 2022 SmartAsset Guide

The first requirement for a health savings account is that you must be enrolled in a high-deductible health insurance plan. You cannot open an HSA if you are uninsured, nor can you open an HSA if you are enrolled in any other form of health insurance plan.

A high-deductible plan is defined as any plan with a minimum deductible of $1,400 for individual coverage or $2,8000 for family coverage. This means you will spend up to $1,400 or $2,800 before your insurance company begins to cover the cost of medical care.

For reference, under the Affordable Care Act, your maximum costs each year can’t exceed $7,800 for individual coverage and $14,100 for family coverage. This is true of all insurance plans, including high-deductibles. This means that after $7,800 or $14,100 in healthcare costs, your insurance plan has to cover 100% of your costs for the rest of the year.

Note that for many households, the high deductible requirement makes HSAs a bad financial choice. These plans still have monthly premiums, and in some cases you will spend more contributing to a health savings account than you would to simply get a better health insurance plan. This is not always the case, such as if your employer only offers a high-deductible plan, but look at your options carefully.

If you have a high-deductible plan in place, the next step is to open an HSA. This process no different from opening any other financial account.

First, if your employer offers benefits, particularly if you receive health insurance through your employer, ask if they offer a health savings account program. Many employers that offer high deductible plans will also help their employees enroll in HSAs. This can make your life easier, especially if they’ll automatically deduct contributions for you.

Second, if you do not have an employer option, contact your financial institutions to ask if they offer health savings account options. You can do this through your bank and any investment brokerages with that you have a relationship with. Most will offer an HSA option.

Finally, you can open a health savings account with many major financial institutions. Popular choices include Fidelity’s dedicated HSA accounts, HealthEquity which partners with Vanguard, and HSA Bank.

If you open your own account, you will make contributions on your own in the same way as any other financial account. In this case, you will then need to deduct your contributions on your taxes to get the full benefit of this account. You do this when you file your year-end taxes.

Bottom Line

How to Open an HSA: 2022 SmartAsset Guide

A health savings account allows you to save and invest pre-tax money for qualifying medical expenses. As long as you’re enrolled in a high-deductible health insurance plan you can open one with most major financial institutions.

Tips to Pay for Healthcare in Retirement

  • A financial advisor could help you create a financial plan to pay for healthcare costs in retirement. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Once you’re eligible for Medicare you lose much of the benefits of an HSA, so you can plan on using that money for your retirement expenses. Learn more about how you can use an HSA to boost retirement savings.

Photo credit: ©iStock.com/PamelaJoeMcFarlane, ©iStock.com/stefanamer, ©iStock.com/erdikocak

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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