Contributions are tax-free. Earnings (through interest or investment) are tax-free. And withdrawals for eligible expenses are tax-free. What’s not to love about health savings accounts (HSAs)?
What might be holding you back from participating in an HSA for the first time, or even getting more out of your HSA funds by investing them, could be a lack of understanding in these accounts. And you’re not alone! About half of all Americans feel knowledgeable about HSAs. We break down common HSA definitions.
A contribution occurs any time funds are placed in your HSA. If you’re an employee who participates in an HSA, then you may see funds each pay period deducted from your paycheck (before taxes are taken out) and contributed to your HSA. Your employer is also eligible to contribute funds to your HSA. In 2021, 26 percent of HSA contributions were made by the employer.
A distribution is the term used to describe the transaction that takes place when you take funds out of your HSA to purchase an expense. If the expense you purchase is eligible for HSA funds, then the distribution amount is deducted from your HSA tax-free.
High-deductible health plan
High-deductible health plan (HDHP) describes any health plan that meets deductible limits set by the IRS. To be eligible for an HSA, you must be enrolled in an HDHP. The IRS sets HDHP limits to determine your HSA eligibility. You can find 2022 HSA and HDHP limits in this blog post.
The number of HSA accountholders who were investing reached 7 percent in 2021. HSA investment assets nationwide increased nearly 50 percent in 2021, eclipsing the $34 billion mark. In order to invest your funds, your HSA balance may need to meet an investment threshold, which is an amount of funds that must be in your HSA’s cash account before you can start moving funds to the HSA’s investment account and start investing.
The term “pre-tax” means “before taxes.” Funds are contributed to HSAs pre-tax, which means you are putting funds into your HSA before they are taxed. By doing this, you’re getting more out of your money than you would be if you weren’t participating in an HSA, because those dollars would be taxed if they went into your pocket rather than a pre-tax account, such as an HSA.
Would you like to learn more about HSAs? Check out our glossary below.
|Contribution, noun||The transaction that occurs when you place funds into your HSA.|
|Catch-up contribution, noun||When you’re 55 years of age or older, you’re able to contribute an extra $1,000 into your HSA every year beyond what the IRS contribution limit is that year.|
|Distribution, noun||The transaction that occurs when you take funds out of your HSA.|
|Health savings brokerage account (HSBA), noun||An account within an HSA where you can choose among a wide variety of investment options. For example, our HSBA lets you choose among 8,500 mutual funds and other investment options.|
|High-deductible health plan (HDHP), noun||A health plan that’s deductible meets the IRS-determined guidelines. HDHP enrollment is required in order to be eligible for an HSA.|
|Investment threshold, noun||A predetermined amount that your HSA balance is required to reach before you can invest your funds.|
|Portable, adjective||Describes your ability to take an account with you. For example, an HSA is portable, which means it stays with you, even if you change employers.|
|Pre-tax, adjective||Describes anything that occurs before taxes. For example, funds are contributed to an HSA pre-tax, which means this occurs before they’re taxed.|
|Transfer, noun||The process of moving your HSA funds from an existing account to a different custodian.|
|USA PATRIOT Act, noun||2011 law that expands the U.S. government’s ability to protect citizens through enhanced domestic security measures. This law requires you to provide personal information so you can be identified when you open an HSA.|
Check out this episode of Benefits Buzz to learn seven basic facts you should know about HSAs.
The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own counsel.