With healthcare expenses on the rise, I regularly meet with people who have questions about health savings accounts (HSA). Health savings accounts have gained significant traction the past couple of years, yet I still rarely see people utilizing them to their fullest potential. A health savings account can be a powerful tool in your financial planning arsenal.
What is an HSA?
An HSA is a tax-advantaged savings account for people with certain types of health insurance plans.
Do you qualify?
In order to be eligible to contribute to an HSA you must be enrolled in a high deductible health plan. A highly deductible health plan has lower premiums but you will have to pay more out of pocket before your insurance starts helping pay for medical expenses.
- When you contribute money to an HSA it is done on a pre-tax basis. If you have an HSA through your employer you may be able to make pre – tax contributions directly through payroll but if you don’t have that as an option, you simply deduct your contributions when completing your annual income taxes.
The annual contribution limit for a single tax filer for 2019 is $3500 and the joint or family limit is $7000. If you are age 55+ you may make an additional $1,000 catch up contribution.
- You can invest the money in an HSA, therefore, you can grow the money long term just as you would a retirement account.
- The money in an HSA grows tax – free and doesn’t have to be used in the year your make contributions.
- Withdrawals from an HSA are completely tax – free as long as it’s to cover a qualified medical expense. If you utilize the HSA before age 65 for a non-medical expense the withdrawal will be taxed as ordinary income and a 10% penalty may apply. After age 65 non – qualified withdrawals are taxed as ordinary income (same as your 401k, IRA, etc.) but the 10% penalty no longer applies.
Unlike a Flexible Spending Account (FSA) which is use or lose each year, you can maintain an HSA for as long as you want. Even if you change health insurance plans and, in the future, no longer have a high deductible health plan, you can still maintain your HSA account. An HSA is the only triple tax benefit (pre-tax or tax-deductible contribution, tax free growth, tax free distributions for qualified medical expenses) vehicle available.
Keep an eye out for a follow up post next week detailing the uses of an HSA and how it can play a vital role in your financial planning picture.