Maximize Your Savings: A Guide to HSAs for the Self-Employed

Self-employed individuals face unique challenges when it comes to healthcare costs. Without employer-sponsored insurance, managing expenses can be tough. A Health Savings Account (HSA) can significantly ease this financial burden. An HSA enables self-employed people with high-deductible health plans (HDHPs) to save pre-tax money for medical expenses, effectively lowering taxable income while covering out-of-pocket costs. Consulting a financial advisor can help determine if an HSA is the right fit for you.

What is an HSA?

A Health Savings Account (HSA) is a tax-advantaged account designed for those enrolled in high-deductible health plans (HDHPs) to save for medical expenses. Funds in an HSA can cover various qualified healthcare costs, including doctor’s visits, prescription medications, and medical procedures.

To qualify for an HSA, you must have an HDHP. For 2024, the IRS sets the minimum deductible for these plans at $1,600 for individuals or $3,200 for families ($1,650 and $3,300 for 2025). Also, out-of-pocket expenses cannot exceed $8,050 for individuals or $16,100 for families ($8,300 and $16,600 for 2025).

In 2024, self-employed individuals can contribute a maximum of $4,150 to an HSA with individual coverage, or $8,300 for family coverage ($4,300 and $8,550 for 2025). Those aged 55 or older can add an extra $1,000 as a catch-up contribution. Unlike flexible spending accounts (FSAs), HSAs allow you to carry over unused funds from year to year, offering greater long-term savings potential.

Steps to Open an HSA as a Self-Employed Person

Opening an HSA is a straightforward process for self-employed individuals. Here are five key steps to follow:

• Enroll in an HDHP: Make sure you have an eligible HDHP, which you can obtain through the healthcare marketplace, directly from an insurance provider, or another suitable platform. Ensure it meets the IRS’s deductible and out-of-pocket requirements for HSA eligibility.
• Select an HSA Provider: Choose a financial institution offering HSAs—such as banks, credit unions, or online investment platforms. Consider fees, interest rates, and investment options, as some providers allow you to invest contributions in mutual funds or securities.
• Complete the Application: After selecting a provider, fill out the online application with your personal details and HDHP information. Note that some providers might require an initial deposit to open the account.
• Set Up Contributions: You will need to contribute to the HSA yourself. Consider direct deposits and automatic transfers to ensure consistent funding. Remember, contributions are tax-deductible and can go up to the IRS’s maximum limits.
• Track Your Medical Expenses: Keep records of all medical expenses you plan to cover with HSA funds. Save receipts, as the IRS may ask for proof that your withdrawals were for qualified expenses.

Advantages of an HSA

HSAs offer several benefits, especially for those who are self-employed. One of the primary advantages is tax savings. Contributions to the account are tax-deductible, which lowers your taxable income. Additionally, earnings or interest gained within the account are tax-deferred. Withdrawals for qualified medical expenses are not taxed, creating a tax-efficient way to cover healthcare costs.

HSAs provide flexibility that many other saving options lack. Funds roll over year after year, enabling users to accumulate a substantial balance over time. This feature makes HSAs valuable for managing not just current medical expenses but also future healthcare needs, including those in retirement.

Investing is another key benefit of HSAs. Many providers offer investment opportunities that allow account holders to increase their savings through stocks, bonds, or mutual funds, akin to a 401(k) or IRA. However, investing carries risks, including the potential for loss.

Control is another significant advantage of an HSA. You decide how much to contribute, how to invest the funds, and when to withdraw money for medical expenses.

Conclusion

Opening an HSA can be simple, yet offers substantial tax savings and a strategic approach to managing healthcare costs. By enrolling in an HDHP, selecting the right HSA provider, and consistently contributing, self-employed individuals can create a vital resource for present and future medical expenses. HSAs stand out for their flexibility, investment options, and tax benefits, making them an indispensable tool for savvy self-employed individuals navigating healthcare expenses.

Tips for Maximizing Your HSA

• A financial advisor can help you create a plan for retirement and healthcare costs. SmartAsset offers a free tool that matches you with up to three vetted financial advisors in your area. You can schedule a free introductory call with a match to find the right fit for your needs.
• Consider using HSA funds for qualified medical expenses in retirement, allowing your other retirement accounts to grow tax-deferred. Here’s how to maximize your HSA for your future.

Photo credit: ©iStock.com/filadendron, ©iStock.com/PeopleImages, ©iStock.com/opolja

The post How to Open an HSA If You’re Self-Employed appeared first on SmartReads by SmartAsset.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.