Health Savings Accounts are more than just a tax-advantaged way to pay for medical expenses. They can also help you reduce your taxable income, save for retirement, and even serve as a back-up emergency fund. There are a lot of misconceptions about who can contribute to an HSA and how they work. Here are answers to some key questions about HSAs and strategies for making the most of these valuable accounts.
What are health savings accounts, and what are the tax benefits?
A health savings account is one of the rare ways to get a triple tax break — your contributions are tax-deductible (or pre-tax if made through your employer), the money grows tax-deferred, and you can withdraw it tax-free for medical expenses anytime in the future. Unlike a flexible-spending account, there is no use-it-or-lose-it rule. In fact, you’ll reap the biggest tax benefits if you use other cash for current medical expenses and let the money grow tax-free in the HSA for the future.
Who can contribute to an HSA? Does your employer have to offer the account?
You can contribute to an HSA even if your employer doesn’t offer an account. To qualify, you must have an HSA-eligible health insurance policy with a deductible of at least $1,350 if you have single coverage or $2,700 for family coverage in 2019 (the minimum deductibles rise to $1,400 for self-only coverage and $2,800 for family coverage in 2020). Most high-deductible policies are HSA-eligible, but there are a few other requirements; ask your insurer if your policy qualifies.
If you have an HSA-eligible policy with single coverage for all of 2019, you can contribute up to $3,500 to an HSA for the year, or up to $7,000 if you have family coverage (rising to $3,550 for self-only coverage and $7,100 for family coverage in 2020). You can contribute an extra $1,000 if you’re 55 or older. You can’t contribute to an HSA after you enroll in Medicare, but you can still use money you’ve already accumulated in the HSA at any time.
What can I spend HSA money on? What happens if I want to use the money for something else?
You can withdraw money tax-free from the HSA for out-of-pocket medical expenses, including any deductibles and co-payments for medical care and prescription drugs. You can also use the money for vision and dental care and other eligible expenses that aren’t covered by insurance. You can even withdraw money tax-free from an HSA to pay a portion of eligible long-term care insurance premiums, based on your age (such as $1,580 in 2019 if you’re age 51 to 60 or $4,220 if you’re age 61 to 70). And after age 65 you can also use the money tax-free to pay for Medicare Part B, Part D and Medicare Advantage premiums. For more information, see IRS Publication 969, Health Savings Accounts.
You’ll have to pay a 20% penalty if you withdraw money from the HSA for non-qualified expenses before age 65. The penalty disappears after that, but you’ll still have to pay taxes on non-qualified withdrawals. However, there are plenty of ways to avoid paying taxes on your HSA withdrawals after age 65, such as using the money tax-free to pay your Medicare premiums, out-of-pocket prescription drug costs, and other eligible expenses.
Is it only worthwhile to contribute to an HSA if I have a lot of medical expenses?
No. In fact, you’ll reap bigger tax benefits if you use other cash for current medical bills and then leave the money growing in the HSA tax-free for future expenses. (In that case, you should look for an HSA administrator that lets you invest in mutual funds for the long-term, rather than just a savings account.) You can then tap the HSA if you have more medical expenses in the future, or you can save it in the account to help pay for health-care costs in retirement.
And if you keep good records, you can withdraw the money from the HSA tax-free anytime in the future, making it like a back-up emergency fund. An interesting quirk of the HSA law lets you withdraw the money tax-free at any time for eligible expenses you incurred since you established the HSA – even if it’s years in the future. Keep receipts showing the eligible medical expenses and that you paid them in cash at the time, and you can withdraw the money tax-free from the HSA for those bills later on. Some HSA administrators and health insurers have Web tools that make it easy to keep track of these records.