Health Insurance

What Is An Unrestricted HSA Card

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 8 minute read

The cost of healthcare is increasing faster than wages and inflation combined. In 2020, the average family health insurance premium was a whopping $22,221 per year, as reported by the Kaiser Family Foundation.

That statistic is perhaps shocking to people whose families do not have access to health insurance through their work.

There has been a rise in the popularity of high-deductible health plans with reduced premium payments as a result of growing health insurance prices, which have made coverage unaffordable for many American families. In a very encouraging move, Congress created health savings accounts (HSAs) to assist Americans in paying for their medical expenses.

What Is a Non-Restricted HSA Card?

Individuals with health savings accounts (HSAs) that act like checking accounts may be given access to their funds through a debit card. In the same way that most debit cards do, the bank will place limits on the number of times each day you may withdraw money and make purchases using your card.

The HSA manager may also put restrictions on what kinds of businesses and ATMs the debit card may be used at.

What Is a Health Savings Account (HSA)?

HSAs function similarly to IRAs in the financial planning industry, but for healthcare expenses. Helping Americans deal with growing deductibles, Congress has approved tax-free donations to health savings accounts. Once the deductible is satisfied, insurance will begin paying a percentage of the cost of covered medical procedures and procedures.

Title XII of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 includes the HSA. This law was enacted that same year. These tax breaks, modeled after a successful IRS pilot program, are meant to encourage people to set aside money for medical emergencies before their health insurance kicks in and covers the deductible.

What Does an HSA Do?

The IRS recognizes health savings accounts (HSAs) as a “qualified retirement arrangement,” meaning that HSA donations qualify for the same tax breaks as IRA contributions. With a Roth IRA, you won’t have to worry about paying taxes on the money you invest or any of the interest it earns.

Anytime you incur a medically-acceptable expense, you have access to your money. More on it in a second.

Putting money away for future medical costs is a simple way to reduce your taxable income. In this sense, it’s like having a savings account for emergencies.

A health savings account (HSA) can serve as a savings vehicle or a checking account. The former are comparable to bank accounts in that money may be deposited and withdrawn for use as payment.

An investment account functions similarly to a brokerage account in that it facilitates the buying and selling of investments at any time. You may open either one to combine the best features of both worlds in your own finances. Both types of HSAs are available from several of the best HSA providers.

The Benefits of HSAs

There are a lot of benefits to having a health savings account. This account type offers the most lenient tax treatment of profits compared to others in this category. Those are only a few of the benefits, though.

  1. Donations Are Tax-Exempt

Donations to your HSA can be deducted from your taxable income in the same way that traditional IRA contributions can. In the short term, a tax break is the most direct benefit of giving. The deduction is available regardless of whether or not you itemize your deductions.

  1. Withdrawals and growth are tax-free.

There are two types of retirement accounts: traditional IRAs, which offer a tax deduction when contributions are made, and Roth IRAs, which offer a tax break when withdrawals are made.

In a fortunate twist, HSAs don’t make you pick between the two. The donation is tax deductible this year, the funds grow and compound tax-free, and you can withdraw them at any time without a penalty to pay for qualified medical expenses.

You may access your funds at any time, unlike with an Individual Retirement Account (IRA), which has a 59 1/2 minimum withdrawal age.

  1. Non-Medical Retirement Withdrawals Are Tax-Deferred

Withdrawals made after age 65 for reasons other than medical treatment are exempt from the early withdrawal penalty of 20%.

Health savings accounts (HSAs) are subject to regulations similar to those imposed on traditional individual retirement accounts (IRAs). With a Roth IRA, you may take your savings tax-free in retirement as long as they are not used for non-medical expenses.

  1. Portability

Unlike many employee perks, a health savings account belongs solely to you. No matter how many times you move employment, insurance providers, investment firms, or account managers, nothing will alter this.

If the criteria for high-deductible health insurance are still met, then the new plan would qualify.

If the account still has funds when you pass away, they will be distributed to your beneficiary or added to your estate. After a spouse passes away, their HSA will be transferred to their surviving partner. Without a living spouse to shield the inheritor from taxes, all money will be taxed at the recipient’s ordinary rate of income.

  1. Flexibility

Since your IRA money is readily available, you can use them to make whatever kind of investment you desire. Your HSA administrator will choose the investment alternatives available to you, but they may include stocks, ETFs, REITs, bonds, mutual funds, savings accounts, and other items.

Account services, such as specialized bank accounts, debit cards, and online bill pay, are generally available from each HSA custodian. Given the flexibility offered, it’s no wonder that some savvy savers and investors use their HSA for purposes other than medical expenses.

  1. Additional Participants

Your employer could contribute to your HSA as an added bonus of working for the firm. Yet, your loved ones can contribute to your HSA to lessen the financial burden of healthcare.

Health savings accounts (HSAs) allow loved ones to make contributions to you without worrying about the unpleasantness of handing you a check, and you may utilize the funds for whatever medical expense you incur. The contributions made to your retirement account by others are still tax deductible if you make the payments yourself.

  1. Every year, rollover

The funds in your HSA do not need to be used in the same calendar year. If you do not utilize the funds in your HSA this year, they will continue to grow tax-free. Deposits and withdrawals are processed on demand, rather than according to a government-mandated schedule.

  1. Your HSA Could Function as an Additional Retirement Account

Truth bomb: medical costs will really eat into your retirement savings. By the time a couple reaches the age of 65, health care expenditures have generally increased to $285,000, per a Fidelity poll. In retirement, medical expenses tend to skyrocket. Investing now might end up saving them a lot of money later.

The tax advantages of an HSA are far more advantageous than those of an IRA (k). Your taxable income this year will go down, and you won’t have to pay taxes on the withdrawals in the future because of your contributions. Many savers max out their Health Savings Accounts each year, at which point they begin putting money into an Individual Retirement Account (IRA).

  1. Can be used as a backup fund

Ingenious applications of the Health Savings Account include using the money in it to cover unexpected expenses. To illustrate, let’s say you have $10,000 in your HSA and a $3,000 deductible on your health insurance, plus another $2,000 in your ordinary savings account.

Health savings accounts (HSAs) allow you to invest a portion of your income tax-free for the purpose of paying for medical expenses. Let’s say your March medical bill totals $1,000.

If you pay for it out of your normal savings, your HSA may continue to grow tax-free while you use the money for any other medical expenses you may have that year. However, in October, you’ll have to pay another $2,000.

Payment for the October charge might come from your HSA. You can take money out for March expenses retroactively if you need to.

Withdrawals from health savings accounts (HSAs) can be made at any time during the year, giving you the flexibility to decide whether or not to utilize your HSA to cover medical expenses after you’ve already covered part of them out of pocket.

The Drawbacks of HSAs

Having a health savings account does not come without its drawbacks. Make sure you know everything there is to know about your healthcare choices before making a decision.

  1. The Demand for a High-Deductible Plan

However, not everyone is happy with the high deductible health plans that are required to qualify for an HSA, even if they may benefit financially from one. Unfortunately, families who would like to contribute to an HSA cannot do so unless they have a high-deductible health plan (HDHP).

  1. Taxes & Penalties on Unqualified Expenses

Like other types of tax-advantaged accounts, HSAs are designed for a specific purpose and must follow certain rules and regulations. The Internal Revenue Service will pursue criminal prosecution in the event of a violation of these statutes.

For Americans under the age of 65, the penalty for using HSA money on non-qualified expenses is a steeper 20 percent. As a point of perspective, the 10% early withdrawal penalty on IRA funds is half as high.

  1. You must keep expense records.

A 1099-SA will be sent by the HSA provider to you and the IRS when you make withdrawals from your HSA. All HSA withdrawals need supporting documentation showing they were used for eligible medical expenses. The IRS will assess a 20% penalty on top of any taxes that are still owed if they aren’t paid by the due date. So bring it on, pain!

  1. The Risk of Delaying Medical Treatments

Earnings from investments should be allowed to grow tax-free if possible. You probably don’t want to give up your market gains if you’ve been doing well. When the market is down, you don’t want to sell low and take a loss, and when it’s up, you don’t want to sell too high and miss out on profits.

Some people avoid using their HSAs or paying for required medical treatment because they are unwilling to take money out of their assets.

But preventive medicine allows for the early identification and treatment of health issues. Preventive care, including yearly checkups, should not be put off out of concern of using up your tax-free HSA.

Bottom Line

As people age, health care expenses take up a greater proportion of their disposable income. Very few people live to extreme ages without incurring enormous medical bills.

In addition to protecting future medical costs, an HSA can be used for retirement and other goals. Health savings accounts (HSAs) provide more flexibility than other account types and may also have tax benefits.

Having to pay for preventative health treatments out of pocket might make people less likely to actually do them. Don’t think that saving a few pennies today is worth risking your health for tomorrow. Financially, preventative care may save thousands over the course of a lifetime by detecting problems early and avoiding more expensive and invasive procedures.

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