What is an HSA? A parent's guide

Raising a family can be one of the most rewarding parts of life, but it's also very costly. Think about how much you spend on your monthly bills, including your mortgage, utilities, and insurance. Then, add in money spent on your children's education, food, clothing, toys, extracurricular activities, and special occasions. And don't forget the medical bills. If you have a high deductible health insurance plan, you may be spending a lot of money out of your own pocket. 

To help alleviate the burden, you can use an HSA. But what is an HSA? It's a health savings account, and it's designed exclusively for you to use to pay your medical bills and qualified health care costs. 

What is a health savings account?

In 2022, 92.2% of Americans had health insurance for at least part of the year, but health insurance plans vary widely. Some plans have low deductibles and provide doctor visits and medical services for small copays. These costs can be more affordable when they pop up.

However, other plans are called high deductible plans. These plans require you to pay large out-of-pocket medical bill costs. Once you reach the deductible, the plan covers a specific percentage. Unfortunately, before you hit that threshold, you might be left with thousands of dollars of medical bills to pay yourself. This is where an HSA account comes in handy.

Simply stated, an HSA is a savings account you use to pay these bills with tax advantages. You put money in the account and can use an HSA debit card to pay the bills. If you have an employer-sponsored plan, your employer might also contribute funds to your HSA account. You open the account the same way you open a traditional savings account, but the HSA account provides unique benefits you won't have with regular bank accounts. Many financial institutions offer HSA cards and accounts, which means you can choose from many options.

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The advantages of an HSA for parents

Insurance is one of the best ways to manage risks, but with a high deductible health plan, you need a strategy to pay your medical bills. An HSA can be a good solution, as it offers many benefits.

Tax-free savings for qualified medical expenses

After opening an HSA, you can sign up for a payroll deduction with your employer, if your employer offers this perk. Your employer will take the specified amount out of your paycheck and transfer it to your HSA. This money reduces your taxable income. In other words, you won't pay taxes on money you place in your HSA plan. You'll have to watch the limits (which we will discuss later). The limits tell you how much you can place in your HSA tax-free. If you deposit more than the limit, you may have to pay taxes on the money. 

If your employer doesn’t offer a plan, you can set one up yourself. Instead of your contributions reducing your taxable income on your paychecks, you can write it off as a deduction on your taxes. Either way, contributing to an HSA reduces your tax liability. 

Tax-deferred growth

You can also choose where the money you invest in your HSA goes. You can pick a traditional savings or checking account, which is safe, as it's in a bank. You also may be able to invest in stocks, bonds, ETFs, mutual funds or more. The best part is that the money grows tax-free. You won't pay taxes on the money you earn from the investment as long as you use it for qualified expenses. If earning more money is one of your resolutions, this might be a good option!

Portable funds

HSAs are also flexible in several ways. First, they're portable, which means you can keep the same HSA if you switch jobs. This is because an HSA is not connected to a specific job or health plan. It's your account to use with whatever job you have and regardless of the health plan. The only requirement is that it must be a high deductible plan. 

The balances are also flexible. You don't have to use your full balance by the end of the year. If you still have a balance at the end of the year, it simply rolls over into the next year. 

Tax-free withdrawals for many healthcare expenses

HSAs have flexible spending options. In other words, you control how you spend the money. You can use it to pay for medical costs from doctor visits for preventive care, medical tests, or hospital stays. You can also use it for vision care and dental services. Additionally, you can use your HSA debit card at your pharmacy when picking up prescriptions. 

One of the top benefits is buying HSA eligible items that are not medical bills or prescriptions. You can print a list of all the qualified items you can buy, but some include:

• Medical masks

• Band-Aids

• Ointments

• Hand sanitizer

• Feminine products

• Cough drops

• Thermometers

• Medical equipment, such as crutches and wheelchairs 

Using your HSA funds for these things means you're buying them with tax-free income. If you can remember this, you'll save a lot of money by maximizing your HSA purchases. 

Eligibility and contribution limits

To make the most of your HSA, learn the HSA limits. In 2024, the IRS increased the maximum HSA contribution limits. Here are the details:

• Individuals can contribute $4,150

• Families can contribute $8,300

Maximizing your HSA contributions is a great money-saving hack. You'll save money tax-free and earn interest. However, you'll still need to report your HSA on your tax return. You may receive an HSA tax form from your financial institution, which provides the information you need for taxes. The IRS needs to know your beginning and ending balances, contributions, and expenditures.

Safeguard your family's finances

At this point, you hopefully have an answer to, "What is an HSA?" As you've seen, having an HSA is very beneficial if you have a high deductible health insurance plan.

Learning how to take advantage of tools like this can help you improve your financial state. You can learn more tips about financial planning by visiting the Greenlight ® learning center. You can also learn about Greenlight's debit card, its cash back features¹, and ways to teach your teens and kids about financial literacy. 

¹Greenlight + Invest families can earn monthly rewards of 1% per annum, Greenlight Core and Greenlight Select families can earn 2% per annum, Greenlight Max families can earn 3% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.