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Using an HSA? These 10 Allowable Expenses May Surprise You

If you're eligible for an HSA (health savings account), it's a wise way to cut taxes and save for the future. But navigating the rules for funding and spending the account can be tricky. Laura covers what you need to know including 10 often-surprising, but allowable expenses that you can pay for using an HSA.

By
Laura Adams, MBA,
May 2, 2018
Episode #542

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10 Savvy Ways to Use an HSA--These Allowable Expenses May Surprise You

I recently received a phone call from my husband who was on his way to the doctor for an annual checkup. He said, “Can I use our HSA debit card to pay for parking at the doctor’s office?” Adam is very savvy with money, so any time he has a financial question, I’m certain other people are wondering the same thing and I should write and podcast about it.

We love using our HSA (health savings account), because it’s a legal way to pay less tax and save for the future. But the IRS imposes many rules about how you can fund an HSA and spend the money. You need to be very familiar with the rules to leverage the account and use it to its full potential.

In this article, I’ll cover key points you should know about HSAs, review seven major benefits they offer, and answer my husband’s parking question. Plus, you’ll learn 10 often-surprising, but allowable expenses that you can pay for using an HSA.

10 Savvy Ways to Use an HSA

  1. Prescription sunglasses 
  2. Eye surgery 
  3. Dental care 
  4. Chiropractic 
  5. Acupuncture 
  6. Fertility enhancement 
  7. Drug and alcohol addiction treatment
  8. Care from a psychologist or psychiatrist 
  9. Home improvements 
  10. Transportation and travel

Before we go into more detail on these HSA savings, here's background on what an HSA is and who can use them to pay for approved medical expenses.

What Is an HSA (Health Savings Account)?

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

The beauty of an HSA is that contributions are deductible on your tax return, even if you don’t itemize deductions.

You can contribute to an HSA if you get health insurance as an individual or through a group plan at work. You always own and manage an HSA as an individual and there are no income limits to qualify. That means you don’t need permission from an employer or the IRS to set one up and it stays with you even if you change jobs or become unemployed.

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 completely tax-free.

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. Just 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!

Unlike another type of medical savings account called a Flexible Spending Arrangement (FSA), there’s no deadline to spend money in an HSA. Funds can stay there indefinitely until you want to use them, even if you change your insurance company, become uninsured, or are unemployed.

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!

So, don’t confuse these two popular medical savings accounts:

  • FSA, or flexible spending arrangement, is a health savings account that’s offered by employers only and must be funded through payroll deductions on a pre-tax basis. It comes with an annual use-it-or-lose it policy. 
  • HSA, or health savings account, can only be opened by individuals and permits tax-deductible contributions with no spending deadline.

Just like with 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 current or future qualified, unreimbursed medical expenses—otherwise withdrawals are subject to income tax plus a hefty 20% penalty.

However, an often-forgotten benefit is that after your 65th birthday, you can spend HSA funds on non-medical expenses with no penalty. You can spend the funds on anything you like, such as a trip to Europe, and it would simply be subject to ordinary income tax.

In other words, an HSA morphs into something that looks like a traditional retirement account if you keep it long enough. That’s a great reason to max it out every year, even if you don’t expect many medical expenses.

See why I like HSAs so much? The tax benefits are better than a retirement account. You get:

  • Tax deductible contributions
  • Tax free earnings
  • Tax free withdrawals
  • Penalty-free withdrawals after age 65

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