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Whether the contributions are saved or spent, an Health Savings Account (H.S.A.) allows for income to avoid taxation today, according to a recent report.
For those who can afford it, saving and investing H.S.A. contributions long term, and paying for current health costs out of pocket, can significantly increase wealth later in life, as found by Vanguard.
Individuals who are 55 years or older can contribute an extra $1,000 to an H.S.A. on top of the annual limits set by the Internal Revenue Service ($3,850 for single person and $7,750 for families in 2023), said Sara Taylor, senior director of employee spending accounts at WTW, a benefits consultant.
“Most people need more medical care, and it can be expensive,” added Taylor.
After enrolling in Medicare, the federal health plan for older Americans, individuals cannot continue contributing to an H.S.A. However, the money accumulated can still be spent tax-free on medical needs, including Medicare premiums and out-of-pocket costs, according to Ms. Taylor. It’s important to note that premiums for supplemental Medigap policies are not eligible for H.S.A. funds. Additionally, once an individual turns 65, they can also withdraw H.S.A. funds for non-healthcare expenses, but they will be subject to ordinary income tax without penalty.
Here are some frequently asked questions about health savings accounts:
What can I buy with my H.S.A.?
You can use your H.S.A. savings for various medical and health expenses, including doctor visits, hospital stays, vision and dental care. During the pandemic, the government expanded the list of eligible expenses to include items such as tampons and pads, as well as nonprescription medicine like pain relief and allergy drugs. For a comprehensive list of eligible health expenses, refer to the I.R.S. Publication 502.