Health Savings Accounts (HSA) are great way to save for future medical expenses and to reduce your current taxes.
As we all face increased out-of-pocket medical expenses, one method to prepare is to open an HSA, which is like an IRA but offers a triple tax advantage. Your contribution is tax-deductible in the year it’s made, regardless of your income. It grows tax-deferred or tax-free. And funds withdrawn for qualified medical expenses are tax-free.
Qualifying for an HSA
To qualify, you must be enrolled in a high-deductible health plan. In 2017 the minimum annual deductible is $1,300 for individuals and $2,600 for a family. The maximum annual out-of-pocket expenses (deductibles, copayments and other amounts, but not premiums) cannot exceed $13,650 for individual coverage and $13,100 for family coverage. Always check with your insurer to confirm that your policy is HSA-eligible. Some health plans offered through the Affordable Care Act exchange are eligible for HSAs.
Unlike other tax-advantaged savings accounts, there are no income limits on the deductibility of HSA contributions. In 2017, you may make tax-deductible contributions of up to $3,400 for individual coverage or up to $6,750 for family coverage. People age 55 and older can contribute an additional $1,000 per year. You can add money to the account until the due date of the tax return for the previous year’s contributions. You may be able to continue to contribute after the age of 65 if you have not enrolled in Medicare Part A or Medicare Part B.
Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.
If your employer offers an HSA in conjunction with a high-deductible insurance plan, check with your benefits department. Some companies will contribute to your HSA for you.
Qualified medical expenses
Any medical expense that qualifies as deductible by the IRS and is permitted by your health plan may be reimbursed by an HSA. Before age 65, you should check with your plan and with current IRS rules before taking a distribution for medical expenses. Additionally, you should keep receipts and good records for all out-of-pocket health costs in the event of an IRS audit.
If you use HSA funds for non-medical expenses before the age of 65, you will have to pay regular income tax plus a 20% penalty.
HSAs don’t have the “use it or lose it” feature of flexible spending accounts. The money can grow tax-deferred in your account for later use. There’s no deadline for making withdrawals. After age 65, the HSA can be used as an extra traditional retirement-savings account. When you make non-medical withdrawals, you are subject only to ordinary income taxes. You can also use an HSA for prior-year expenses as long as the HSA was established before the expenses were incurred.
HSA investment options and cost
Each administrator has a different fee schedule, which may include account setup and closing fees, monthly or annual maintenance fees and additional fees for using an investment account. Some waive fees when your account reaches a minimum balance. Most charge a flat fee, so the impact decreases as your balance increases.
Some investment options are offered through Health Savings Administrators, which offers access to some low-cost Vanguard funds. HSA Bank offers self-directed investing through TD Ameritrade Brokerage Services.