High-deductible health plans are becoming more common. A big benefit of these plans is the use of a health savings account (HSA). An HSA allows you to save money for medical expenses and reduce your taxable income.
To open an HSA you must be enrolled in a high-deductible health plan. The IRS defines this as an individual plan with a minimum annual deductible of $1,300 and annual out-of-pocket maximum of $6,550 for self-only coverage. For family coverage these amounts are $2,600 and $13,100 respectively. These limits are applicable for 2017 and are adjusted annually for inflation. If you are eligible for Medicare or claimed as a dependent by anyone on their tax return you are not eligible to make HSA contributions.
Many insurance companies offer HSAs, for those that do not, most financial institutions offer separate HSA accounts. Once you have established your HSA, you can decide how much to contribute. The maximum amount you are allowed to contribute in 2017, again determined by the IRS and adjusted annually, is $3,400 for self-only coverage and $6,750 for family coverage. If you are over age 55 you can "catch-up" by adding $1,000 to the maximums each year.
There are a few basic tax advantages to an HSA. First, the money you contribute is tax deductible. If your employer offers an HSA plan, the contribution is deducted from your pay-check before taxes are calculated. If you make contributions outside of payroll, you can deduct the HSA contributions on your tax return. Another tax advantage is the tax free growth of your HSA. Any interest, dividends, or capital gains in your HSA account are not included in your taxable income.
An often overlooked component to HSAs, are their investment potential. Depending on where you hold your HSA you may be able to invest in mutual funds, ETFs, stocks, and other investment vehicles to grow your investment.
If you use the money in your HSA to pay for qualified medical expenses there are no penalties or taxes due. Once you turn 65, you can withdraw the money for any reason and not incur a penalty – however, the amount is included in your taxable income for that year. If you withdraw the money before age 65 for a non-qualified expense there is a 20% penalty.
What is a qualified medical expense? The IRS makes that determination, and there are numerous resources to ascertain what qualifies. HSA Bank publishes a convenient list that can be found here.
There are numerous situations that can alter the basics described above. If you have additional questions about HSAs or how they may relate to your specific circumstances, please contact your tax advisor for more information.
