In my humble opinion, the HSA is highly underrated and underused by many here in America. The more I look into this gem of a product, the more excited I get about contributing to it. We upped our contributions to our HSA this year because one of the kids needs braces and I want to make sure we deduct every bit of our out-of-pocket costs for those things. We’re working to maximize tax deductions, especially while the kids can still be counted as dependents. So that got me thinking; What can I pay out of my HSA? What other regular purchases do we make that we can be purchasing with HSA funds so that we can minimize taxable income?
The benefits of HSAs are many. Read them over and see how you can better use an HSA to prepare yourself for medical expenses now and in the future.
Your Contributions Are Tax Deductible
Yep. Up to $3400 for yourself, and a total of $6750 for your family for the year 2017. And if you’re over age 55 you can make (and deduct) an additional $1,000 as a “catch-up” contribution. Another bonus? As with IRAs, you can make contributions for the previous tax year up until tax day on the current tax year. In other words, you can make 2016 HSA contributions up until April 15 of 2017.
Contributions are “Rollover-able”
You can keep HSA contributions in your HSA account year after year until you’re ready to use them. This makes the HSA a great part of a retirement plan, especially if you expect to have high medical costs as you get older.
Recommended Reading: The Complete Cardinal Guide to Planning for and Living in Retirement
Withdrawals From an HSA are Tax-Free
As long as you use them for qualified medical expenses. We get to what is a “qualified medical expense” next.
What Qualifies as HSA Usable?
The list of what counts as a qualified medical expense might be longer than you think. Let’s start with the basics.
Preventive Care, including:
- Annual physicals
- Routine prenatal and well child checkups
- Immunizations
- Tobacco cessation programs
- Obesity weight loss programs
- Screening services for all sorts of conditions such as cancer, heart and vascular diseases, infectious diseases, mental health conditions, substance abuse, vision and hearing disorders and more.
Now let’s talk about some HSA qualified expenses you might not have heard about.
- Bandages
- Artificial teeth
- Braille books and magazines
- Breast pump supplies
- Home improvements that are directly related to safety or to make wheelchair accessible but don’t add to the value of the house, such as installing handrails, widening hallways and interior doorways, grading of the landscaping to provide access to the residence and any other modifications that help make the home, cabinets or outlets better accessible to one who might have a handicap of some sort.
- Chiropractic care
- Hearing aids and hearing aid batteries, repair and maintenance
- Fertility enhancements such as IVF or vasectomy reversal
- Service dog purchase and care, including food, grooming, vet visits, etc.
- Lead-based paint removal
- Travel expenses associated with outpatient or inpatient services such as gas and oil for the car, parking and toll fees, hotel stays, etc.
- Pregnancy test kits and birth control pills
- Contacts, enzyme cleaner and contact solution
And a host of other things! For the full publication from the IRS, click here.
Things That are NOT HSA Eligible
There are also several things that do not count as qualified medical expenses for an HSA. Here are a few:
- Babysitting and Child Care
- Exercise lessons if they are only for improvement of general health (some obesity exercise programs qualify)
- Cosmetic surgery and electrolysis
- Hair transplant supplies and services
- Health club memberships
- Non-prescription medicines (with the exception of insulin)
- Nutritional supplements (unless they are prescribed by a physician to treat a specific condition and not for general health improvement)
How to Figure What You Should Contribute to Your HSA
If you’re tracking expenses, this should be easy. Simply go over the last year or two’s medical expenses and add up how much you spent on qualified expenses.
If you haven’t been spend tracking, you’ll have to guess. But make sure you START spend tracking today.
Work to think ahead to all potential upcoming expenses. Do you have annual physicals? Any kids that will be needing braces or eyeglasses? Will you be looking at upcoming surgery for any reason? Are you thinking about quitting smoking?
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Find out the cost of each of the services you’ll be looking at and divide that number by the number of months in the year or the number of months before you’ll be getting the treatment.
In the case of our child’s braces, we knew we’d have to pay about $1600 out of pocket after insurance coverage and Rick’s employer’s HSA contribution. So we started putting money away this year for the braces that will go on in January after Rick’s employer gives us $1200 for their contribution. This way we’re minimizing our cost for the braces and maximizing our tax deduction for them at the same time.
Better Financial Management
Improving the way you manage your finances is an ongoing process. Every step you can take to increase your net worth by reducing spending, increasing saving and minimizing your tax burden puts you one step closer to building a financial picture that will free up more of your cash for doing the things you really have a passion for, such as hobbies, work that you love and charitable pursuits that help the poor and needy in the world.
Improving the way you manage your money also lessens the chances that you will become in need of help from overburdened federal and local institutions that already have their hands full with the many suffering people in our country and around the world. So if you’re in a place where you’re healthy, strong and able to contribute, make a part of that contribution bettering your own financial situation so you can strengthen your own personal situation and become better able to help those who cannot fend for themselves.
I love the HSA option! We’ve been maxing it for several years – it’s paid for braces, glasses, contacts, chiropractor and other medical expenses. I do try to pay the smaller medical expenses out of pocket to keep as much in the HSA as we can. We have the option to invest, so we have a portion of the funds invested in a Vanguard account. The benefits are far reaching! You just can’t beat tax free in and tax free out.
I haven’t been using it for contact solution and I’m so excited about doing so this year!!! Yeah, double bonus on the HSA, woohoo!
Great summary! There are *so* many things that can be paid through an HSA… and even paid in the future. Because of that we save all receipts related to medical “stuff” for future withdraw from our HSA. Short term we’ll just let it sit and grow tax free. :))
Isn’t it fabulous?
THANK YOU for sharing this. Mr. Picky Pincher and I have been trying to learn the ins and outs of HSAs before we start having kids. He apparently qualifies for an FSA–do you have much knowledge of those? I’m all about anything that lowers our tax liability, but it doesn’t make sense for us to contribute to an HSA/FSA until we have the health costs associated with having kids.
I’m not a huge fan of FSAs simply because they’re not “rolloverable”. Mr. SSC ( http://www.slowlysippingcoffee.com ) wrote about his experience with them on his site – you should check that out. He lives in TX too. The thing about HSAs is that you can rollover the funds, even up into retirement, so it can be kind of part of a retirement plan too, and some HSAs allow you to invest the money as well, as Amanda mentioned.
I like the redesign of the website, it looks great! You heard my complaints about our plan and the restrictive nature of our FSA. Fortunately, I got the last check on Monday for the remainder of our money that was in there, so yea for that! Money not wasted. I elected to NOT add any extra into the FSA this year though, due to the complexity of it.
However, I’m now thinking that was a short sighted decision considering the relative “ease” of getting reimbursed for the costs. Next year I can switch back to it so no major loss there, just ~$130 in taxes on the $500 that would have gone in there.
But, at least for us, we haven’t hit a point of the HSA paying out for us to contribute. I know it’s a tax shelter and you can keep it as long as you want so you can use it in retirement, but if we’re only going to be contributing to it for another year or 2 it won’t really have the compounding as if we’d started contributing 5 years or longer ago. With that and the fact it woud have been more expensive than the other plan the last 2 years is why we haven’t swtched to an HSA yet.
Thanks, Mr. SSC! Yeah, they don’t work for everyone. I think that especially this year the HSA will be great for us with the orthodontic expenses.
An HSA is something my wife & I are considering for the future. We rarely go to the doctor at the moment so we think there are better uses for our money. To be fair, my last job had something similar to an HSA that I contributed to. There was enough money in it that we basically had our first baby for free. We’ll have to pay for the 2nd baby in April out of pocket, so we shall see how much more it will cost!
Yeah, we don’t hardly ever go to the doc either, but it’s come in real handy with the kids’ braces, which cost upwards of five grand. It’ll be interesting to see your out-of-pocket baby costs!
I think it also should be noted, especially for those who are 50 and under, there is a lot of upside in putting $ in an HSA because I would expect the list of things you could use the $ for will only grow longer, not shorter. I get excited about HSAs for many reasons, but most of all I love that it provides people with a separate medical emergency fund.
Yes, lots of great benefits!!! Thanks, DC!
I love having an HSA — I switched from a no deductible, no office copay, $10 rx copay plan a few years ago. I spent several hours printing every insurance claim from the previous year and doing math to compare the plans, then set my contributions to equal the difference in premiums so that if I still had money left over at the end of the year, I knew I was ahead.
Since then I’ve maxed my contributions and last year ended up using a big chunk. I’m hoping that once these procedures/surgery are paid in full I can just start accumulating healthcare money 🙂
This is one of the most straightforward articles I’ve read on the process — thank you!!
Thanks so much, Katscratch! Glad you enjoyed it!