A Health Savings account (HSA) is a tax-exempt account that will allow you to pay for a diversified list of allowable medical expenses. In addition to saving money, you can spend these funds on medical expenses in retirement. This makes having an HSA a considerable advantage now and in the future.
What makes an HSA so desirable? How about a triple tax advantage? IRA account money gets taxed, either going in (Roth) or coming out (Traditional/SEP/SIMPLE). However, if appropriately used, HSAs never get taxed. HSAs come with three significant tax benefits. The first benefit is that you can contribute on a pretax basis. Second, your savings grow tax-free over time, and third, you can make tax-free withdrawals to cover eligible medical expenses.
With that said, there are firm IRS rules for contributing and spending HSA funds.
Some of the key facts are as follows:
- To qualify for an HSA, you must have a high deductible health plan (HDHP).
- There is no income limit to qualify for an HSA.
- There are annual contribution limits for these accounts.
- For 2021, you can contribute as much as $3,550 as an individual or up to $7,100 if you have a family HDHP. If you are 55 or older at the end of the tax year, you can increase these limits by $1,000.
- Any HSA distributions spent on non-qualified expenses are subject to a hefty 20% tax penalty unless you are 65 or older.
- Contributions to your HSA can come from you, your employer, or someone else such as your spouse and are deductible on your tax return, yes, even if you don’t itemize deductions.
What is a High Deductible Health Plan?
A high deductible health plan (HDHP) typically has a higher annual deductible than a standard health plan but usually comes with lower premiums. An HDHP is a plan with a minimum annual deductible of $1,400 for an individual or $2,800 for a family. You must be covered under this type of health plan to make contributions to an HSA. Medicare does not qualify. Beginning the first month that you enroll in Medicare coverage, you can no longer make contributions.
What if I Become Uninsured or Unemployed?
Another essential factor with HSAs is that the account remains yours even when you become unemployed or uninsured. However, keep in mind that these circumstances could affect your ability to make contributions. If you need to stop contributing for any reason, you’re still able to use the money in your HSA on qualified healthcare expenses.
As mentioned, distributions from an HSA for qualified medical expenses are tax-free. Tax-free distributions include any interest earnings or capital gains if you choose to invest the funds held in your HSA. In retirement, once you reach age 65, you can take distributions for medical or non-medical purposes without a penalty; however, you will still need to claim those distributions as income in the case of non-medical distributions.
What Can I use an HSA for?
There is an extensive list of IRS-qualified medical expenses in which you can use an HSA. Typical costs include doctor’s office visits and co-pays, laboratory fees, vaccines, and dental cleanings, among many others. Some otherwise uncommon expenses would consist of acupuncture, chiropractor services, and even medical equipment such as hearing aids or a wheelchair.
In addition to all the established eligible medical expenses, the new CARES Act has expanded the list to include over-the-counter medications for which you do not need a prescription.
For more information or questions regarding HSAs, contact Accuplan Benefits Services at (800) 454-2649