If you have questions about health savings accounts, we have answers:
1. What is an HSA?
A health savings account (HSA) is a tax-advantaged account established to pay the current and future qualifying medical expenses of the account holder, the account holder’s spouse and all of the account holder’s tax dependents. With money from this account, you pay for healthcare expenses that are not covered by the account holder’s HSA eligible health plan.
2. Am I eligible to have an HSA?
To put money into a health savings account, you are required to have an HSA eligible health plan— sometimes referred to as a consumer-directed health plan (CDHP) or high-deductible health plan (HDHP)—in effect on the first day of the month. Additionally, you are not permitted to have any other health coverage that reimburses non-preventative products and services below the deductible, and you cannot be enrolled in Medicare or be claimed as a tax dependent on someone else’s tax return.
3. What is a high-deductible health plan (HDHP)?
An HDHP is simply health insurance that meets certain minimum deductible and maximum out-of-pocket expense requirements set forth by the IRS.
4. What are the benefits of having an HSA?
Health savings accounts in many ways offer something for everyone, offering you a way to gain some financial security today and in the future. As triple tax-advantaged accounts, health savings account contributions can be deducted pretax from your paycheck, lowering your taxable income; any interest or investment gains on the money is tax free; and withdrawals from an HSA are tax free, as long as the money is spent on qualified medical expenses.
5. What qualifies as IRS-qualified medical expenses?
HSA funds may be used tax-free when paying for qualified medical expenses as described in section 213(d) of the Internal Revenue Service Tax Code. A list of these expenses can be found on the IRS website at www.irs.gov in publication 502 – Medical and Dental Expenses.
6. Can I take money out of my HSA for non-medical expenses?
Yes, but if you withdraw money to pay for something other than a qualified medical expense, you will have to include that distribution as other income when filing taxes and pay an additional tax of 20 percent penalty on the amount used for a non-qualified expense. (Tax penalty for non-eligible expenses doesn’t apply if you’re 65 or older).
7. Do HSA funds rollover?
Yes, any unused funds are yours to retain in the health savings account and accumulate toward future healthcare expenses. Your HSA is portable, meaning that you can take it with you if you change employers and into retirement (post 65 years old) where funds may be used for non-qualified medical expenses without being subject to the 20 percent penalty.
8. What’s my HSA contribution limit?
The IRS provides inflation-adjusted health savings account contribution limits each year. For 2019, if you’re covered by an individual HSA eligible health plan, sometimes referred to as a consumer-directed health plan (CDHP) or high-deductible health plan (HDHP), the IRS allows you to put as much as $3,500 into your health savings account (HSA). If you’re contributing to an HSA and on a family CDHP, the maximum amount that you can contribute is $7,000.
If you’re 55 or older, you can contribute an extra $1,000 annually for a total of $4,500 or $8,000 for account holders on a family plan—with catch-up contributions accepted at any time during the year in which you turn 55. These HSA contribution limits are new for 2019 and just slightly higher than in 2018—$50 more for self-only coverage and $150 more for those on a family plan.
9. Are HSAs used to pay for current medical expenses or to save for retirement?
Either or both. Because healthcare costs during retirement can be daunting, HSAs have become a favorite way to put money away for future medical bills while lowering taxable income. One oft-cited estimate from Fidelity: A 65-year-old couple retiring in 2017 can expect to spend an average of $275,000 on medical expenses throughout retirement. This is up from $260,000 in 2016, so one can only imagine how staggering this figure will become for those retiring a few decades from now.
10. What’s this I hear about investing my HSA dollars?
An health savings account is an excellent savings vehicle for healthcare costs during retirement, but few people have discovered that they can maximize their account’s long-term savings potential by investing their contributions in stocks, mutual funds and other investment vehicles. Studies show that HSA holders who take advantage of investments often have substantially higher account balances. Devenir reports that the average balance of an HSA investment account is six times larger than a non-investment holder’s average HSA balance. Over time, the savings advantage continues to multiply: The Employee Benefit Research Institute found that HSA investment accounts opened in 2005 had an end-of-year balance in 2016 that averaged $31,239 compared to average balances of $7,233 in accounts without investments.