Who doesn’t want a tax-sheltering strategy?
The problem is that most traditional tax shelters have a number of disadvantages:
- They require large sums of money to be invested;
- they can have expensive maintenance costs;
- they yield tax savings in one direction only (i.e., IRA provides a deduction going in but produces taxable coming out, or a Roth-IRA provides non taxable income on withdraw, but no deduction for deposits into the account),
- as income increases, they can be reduced (sometimes to a zero current benefit).
But suppose there was a shelter that took 10 minutes to create, has almost no maintenance costs, gives you a deduction going in, and didn’t create income when the funds are withdrawn!
In addition, just suppose that none of the above disadvantages applied?
Interested? I thought you might be.
HSAs (Health Savings Accounts) are very unique in that you can generate a deduction for funds deposited but they generate no income to you when funds are disbursed for medical expenses such as co-pays, dental care, and most out-of-pocket medical expenses.
In addition they are the trifecta or triple-play of tax-savings offering:
- Tax-Deductible Contributions
- Tax-free accumulation of interest and earnings
- Tax-free distributions for medical expenses.
The good news is that almost anyone can qualify for a Health Savings Account (HSA).
To be eligible to contribute to an HSA, an individual must have a “high deductible health plan,” which is a health plan with an annual deductible that is not less than a certain limit each year and for which the annual out-of-pocket expenses, including deductibles, co-payments, and other amounts, but excluding premiums, do not exceed a certain limit each year.
Here are the current dollar amounts for these types of plans.
|HSA Contribution Limit||HDHP Minimum Deductible||HDHP Maximum Out-of-Pocket||HSA 55+ additional contribution amount|
To recap, in order to be eligible for an HSA:
- You must be covered under a high deductible health plan (HDHP)
- You have no other health coverage except what is permitted by the IRS.
- You are not enrolled in Medicare
Here are some of the most common questions we get on Health Savings Accounts.
How much can I contribute to my HSA?
You can make pre-tax contributions (or tax-deductible contributions, if not through an employer) in 2013 of up to $3,250/year if you have individual coverage, or up to $6,450/year if you have family coverage. People age 55 and older can save an extra $1,000 per year. You can add money to the account until the tax-filing deadline (April 15, 2014, for 2013 contributions).
For 2014, the HSA contribution limits increase to $3,300/year for individual coverage, and $6,550/year for family coverage.
How can I use my HSA money?
You may spend the HSA money tax-free on out-of-pocket medical expenses, such as your deductible, co-payments for medical care and prescription drugs, or bills not covered by insurance such as vision and dental care.
The IRS determines the types of medical expenses you can use tax-free with HSA funds.
Unlike with a flexible spending account (FSA), you don’t have to use HSA funds by the end of the year. Rather, HSA funds can grow tax-deferred in your HSA account for later use.
If you use HSA funds for non-medical expenses, you are required to pay taxes on the withdrawal, plus a 20% penalty, before age 65.
How do I invest my HSA money?
HSA administrators typically offer accounts that are easy to access for medical expenses. And, many HSA administrators or banks will let you shift money into mutual funds and other investments after your HSA account balance reaches a certain level.
Can I contribute to my HSA account after age 65?
You can keep your HSA account at any age, but you can no longer make new contributions to the account after you have signed up for Medicare Part A or Medicare Part B.
Do the HSA tax benefits phase out at certain income levels?
No. With an HSA, there are no income limits.
If I set up an HSA through my employer, what happens if I switch jobs?
You can keep the money in your HSA account after you leave a job, similar to a 401(k). There is no requirement to spend it before you terminate employment.
How does health reform change HSAs?
The Affordable Care Act (“health reform”) was signed into law in 2010 and made two changes to HSAs:
- In 2011, over-the-counter medications were no longer eligible for tax-free withdrawal unless obtained with a prescription (except for insulin).
- In 2011, the excise tax for non-qualified HSA withdrawals increased from 10% to 20%.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.
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