Anyone that has been to the doctor recently knows just how out of control the costs of medical expenses have become. Meanwhile, it is becoming increasingly more popular for employers to offer high-deductible health insurance (HDHI). This is a combination that may lead to a situation where you are stuck owing a considerable amount…enter the health savings account (HSA).
HSAs can be used to pay for qualifying out-of-pocket medical expenses using tax-free dollars. This includes:
As more employers have started to offer HDHI, HSAs are becoming more and more popular. HSAs offer a variety of tax advantages depending on your age, income and whether you have individual or family coverage. In order to qualify for an HSA, you must be covered under HDHI plan, as defined by the Internal Revenue Service.
HSA Tax Advantages
Contributions made to a HSA are tax-deductible, and contributions made by an employer are tax-free! Interest accrued in the HSA is also tax-free, and the accounts are “portable,” meaning they stay with you even if you change jobs or leave the workforce.
Individuals can withdraw money from a HSA without paying taxes to cover the cost of qualified medical expenses, but if the money goes toward nonmedical purposes, the amount is subject to income tax and an additional 20 percent tax.
Most importantly, unspent funds can remain in a HSA from year to year, unlike flexible spending accounts and health reimbursement accounts that require consumers to spend or lose the money that was set aside each year, meaning there is no pressure to “use it, or lose it”.
Lastly, health savings accounts convert to typical individual retirement accounts once you reach retirement age. So if you use your HSA funds only for qualified medical expenses, you can net a triple tax break:
- You get the pre-tax benefits of an IRA;
- The tax-free withdrawal benefits of a Roth; and,
- The tax-free growth benefits of both.
Otherwise, after age 65 you can spend the money on anything, but that money would be taxed, similar to IRA withdrawals.
If your health plan’s deductible (for 2015) is at least $1,300 ($2,600 for a family), you can open an HSA and contribute up to $3,350 per year for an individual, or $6,650 per family per year. As with an IRA, there’s also a “catch-up provision” that allows you to stash an extra $1,000 a year if you’re 55 or older, and these contributions are 100% tax deductible from your gross income.