Why you should consider an HSA now
Health Savings Accounts
("HSAs") have been around since 2003; however, based on my
observations, these types of accounts are not widely used. With the focus on health insurance the past
few years, now is a good time to consider the use of an HSA. If you qualify to contribute to an HSA and
have the cash flow, they are a really great tax saving and investment vehicle.
What is an HSA?
An HSA is a type of
account that you contribute funds to just like an individual retirement account
("IRA"). Many people are not eligible to make tax deductible
contributions to an IRA because of income limitations, participation in employer
sponsored plans, etc. Those people can consider an HSA as an alternative. An
HSA is one way to reduce your taxes, save for retirement, and save for medical
expenses at the same time. When you make a contribution to an HSA, a
subtraction from adjusted gross income can be claimed on your tax return. This
reduces your adjusted gross income and ultimately the amount of tax you owe. Once
the funds are in the HSA, they can be invested or left in cash and are
available to pay for medical expenses.
In addition, medical
expenses usually do not provide much tax benefit as a normal tax deduction. By
contributing to an HSA and using those funds for medical expenses, you are able
to indirectly deduct your medical expenses.
Who Can Qualify:
The first qualification
is that you must be covered by a “high deductible health plan” or “HDHP”. High
deductible is defined as a deductible of at least $2,600 per year for a family
or $1,300 for a single person. In
general, as long as you are enrolled in an HDHP and eligible for an HSA as of
the first day of the last month of your tax year (December 1st for
most taxpayers), then you are considered enrolled in an HDHP for the entire
year.
The second qualification
is that you cannot be enrolled in Medicare. If you are enrolled in Medicare,
you are not eligible to contribute to an HSA. However, if you already have
funds in an HSA, you can continue to use these funds.
The third requirement is
that you cannot be claimed as a dependent on someone else’s tax return.
The fourth requirement
is that you have no other health coverage (such as a flexible spending account
or “FSA”) except what is permitted. See IRS
website for further information
on this.
Distributions:
Distributions from the
HSA often occur as medical expenses. The custodian of the HSA will usually give
the HSA owner a debit card to use at medical service providers. Distributions and payments from an HSA are
not taxable if they are used for qualifying medical expenses. Qualifying medical expenses are those that generally
qualify for a tax deduction as a medical expense such as prescriptions, co-pays,
hospital and doctor expenses, etc. Only certain types of insurance
payments are allowed as qualifying distributions, so be sure to look into this
further if you are planning to use the HSA for payment of health insurance
premiums.
If the HSA funds are not
eventually used for medical expenses, the account is allowed to accumulate and
grow tax free. Once the account holder reaches age 65, the funds can be
withdrawn for non-medical purposes without being subject to a withdrawal
penalty. Prior to age 65, non-medical distributions will be subject to a
20% penalty. After age 65, funds withdrawn for non-medical purposes will
be subject to income tax on the growth of the investments.
Contribution Limitations:
HSA contributions are
subject to annual limitations. The annual contribution for a family in 2017 is
limited to $6,750. The 2017 annual contribution for a single person is
limited to $3,400. Those age 55 or older can contribute an extra $1,000.
Where can you setup an HSA?
Many local banks as well
as online banks have the ability to establish a health savings account for you.
As with anything, you should compare the different banks to determine which one
is best for you. In addition, your health insurance provider may provide the
ability for you to establish an HSA.
Summary
HSAs are a great vehicle
for saving taxes on your medical expenses and possibly saving for retirement at
the same time. If you are eligible and can afford to put the money into an HSA,
then a health savings account is something for you to seriously consider.
