45% of Workers Aren't Saving for Healthcare. These 2 Accounts Can Lower Your Taxes and Set You Up With Money for Medical Bills
It's important to have healthcare funds at all times. Read on for ways to lower your taxes at the same time.
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There are certain expenses we can all make an effort to shrink. It's within our power to cut the cord with cable, say no to streaming services, and go out and buy groceries instead of relying on takeout.
When it comes to healthcare costs, though, we unfortunately have a lot less control. It's hard to know when a health issue might arise that ends up being expensive to treat. And without money in a savings account, a series of medical bills -- or even a single medical bill -- could be your ticket to debt.
Recent data from Bank of America, however, finds that 45% of workers today are not saving specifically for healthcare expenses. If you're in that boat, it's time to change your ways. And there are two specific accounts you may want to look at as a home for your healthcare savings.
1. An FSA
An FSA, or flexible spending account, allows you to contribute money on a pre-tax basis to pay for qualified medical expenses. This means that every dollar you put into your FSA is a dollar the IRS can't tax you on, up to an annual limit.
The amount you can put into an FSA changes yearly. Right now, contributions of up to $3,200 are allowed.
However, you don't want to overfund your FSA, because these accounts require you to spend down your plan balance every year or otherwise risk forfeiting funds. So if you don't expect your out-of-pocket healthcare expenses to exceed $1,200 this year, then it certainly doesn't make sense to max out.
One thing you may want to do, though, is contribute enough to cover your health insurance deductible. This is the amount of money your insurer requires you to pay out of pocket before it starts picking up the tab for your care.
2. An HSA
An HSA is similar to an FSA on a basic level in that you contribute pre-tax dollars for healthcare expenses. But HSAs actually work differently.
With an HSA, you don't have to spend down your balance year after year. Quite the contrary -- with an HSA, you're encouraged to keep your money in your account as long as possible. That's because HSA funds can be invested so they grow into a larger sum over time. And investment gains in an HSA are tax-free, as are withdrawals from these accounts when the money is being used to cover qualified healthcare expenses.
Like FSAs, HSA contribution limits change annually. This year, you may contribute up to $4,150 if you have individual coverage and are under age 55. The limit is $8,300 if you're under 55 with family coverage. If you're 55 or older, you can put in an extra $1,000 on top of whichever limit applies to you.
However, you can only participate in an HSA if you're enrolled in a high-deductible health insurance plan. In 2024, that means an individual deductible of $1,600 or more, or a family deductible of $3,200. Your plan must also have an out-of-pocket maximum of $8,050 for individual coverage or $16,100 for family coverage.
The last thing you want is to get stuck with a giant medical bill you can't pay. So try to get into the habit of socking funds away in the bank for healthcare purposes. And if you can do so in an FSA or HSA, you'll save some money on taxes along the way.
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