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A health savings account (HSA) is a type of account designed to help you offset the cost of high-deductible health plans, and let you pay for medical expenses with pre-tax money. At the end of 2015, more than 16 million Americans had an HSA.
Here’s how to boost the value you get from your plan:
Understand your plan. Individual HSA holders can contribute $3,350 tax free in 2016; for family plans, the limit is $6,750. Holders 55 and older can save an extra $1,000. Some plans even have investment options where the earnings are also tax free, as long as they’re used for qualified medical expenses.
Keep your receipts. Know what’s eligible for tax-free reimbursement. The IRS allows you to pay for out-of-pocket medical expenses such as co-pays, prescription drugs, and dental and vision costs tax free, but if you use the money in your account for a fee that’s not allowable, you’ll pay taxes plus a hefty 20% penalty. See IRS Publication 502 for a complete list of allowable reimbursements.
Stretch your dollars. Unlike a flexible spending account (FSA), where the funds must be used within the year, you can roll over the money in your HSA from year to year and save the money in it to pay for future healthcare costs. That means you can let the money in it grow tax free if you can afford to pay those reimbursable expenses out of pocket now.
