A Health Savings Account (HSA) is a tax-advantaged account designed for people with certain types of health insurance plans to save for medical expenses.
One of the important differences between an HSA and a flexible spending account, or FSA, is that you aren’t required to spend all of the money in your account each year, or any of it at all. You carry over any unused balance indefinitely.
Another difference is that money in your HSA can be invested until you’re ready to use it. This is similar to a 401(K) with a basket of investment funds you can choose from. For this reason, HSAs can make excellent retirement savings vehicles.
Who does and does not qualify for a Health Savings Account?
One of the worst characteristics of HSAs is that they aren’t available to everyone. To be eligible to contribute to an HSA, you must have a qualifying high-deductible health plan.
For 2018, the IRS definition of a high-deductible health plan is a policy with a deductible of at least $1,350 per individual or $2,700 for a family, and whose out-of-pocket maximum is at most $6,650 or $13,300 (individual/family).
Also, if you’re covered by a high-deductible plan and another non-qualifying health plan, you can’t use the high-deductible plan as grounds for eligibility. Medicare recipients, as well as anyone who can be claimed as someone else’s dependent, don’t qualify either.
Contributions allowed to a Health Savings Account
You can contribute as much as $3,450 to a Health Savings Account in 2018 if you have individual health coverage, or $6,850 if you have a family health plan. If you’re 55 or older, you can contribute an additional $1,000 as a catch-up contribution. You can make your HSA contributions for a given tax year until the April tax deadline for that year. For example, your 2018 HSA contributions can be made until April 15, 2019.
Tax benefits to a Health Savings Account
An HSA provides a triple tax benefit. How does that work? Firstly, money is contributed on a pre-tax basis meaning your contributions are tax-deductible. Secondly, money withdrawn for qualified healthcare expenses, including any investment gains, are 100% tax free. Lastly, while your money is invested in the HSA, any income the account earns isn’t taxed.
Withdrawal options and consideration for non-medical expenses
After you reach age 65, you can withdraw money from the account for any reason without paying a penalty. That’s a benefit, except it is important to know that the money you withdraw for non-medical expenses is considered taxable income. There are no required minimum distributions.
However, if you withdraw any money from your HSA before age 65 for any reason other than paying medical expenses, you’ll face a 10% penalty from the IRS.
A broad range of expenses qualify as Health Savings Account expenses
Everyone has had their insurance company deny medications, procedures, or other expenses relating to their health. Expenses that qualify for using HSA funds include the following:
- Chiropractor services
- Dental services
- Diagnostic devices
- Surgical expenses
- Hearing aids
- Home care costs
- Laboratory tests
- Long-term care costs
- Prescription medications
- Nursing services
- Psychiatric care
- Eye exams, glasses, and contact lenses
- Medical devices such as crutches
- Cobra, Medicare and long-term care premiums
A Health Savings Account, with its tax benefits, is a great way to be prepared for health expenses at any age, but especially as a senior in retirement with a fixed income. If you want to learn more about whether a Health Savings Account is right for you and your situation, contact me today!
Dan