Tax-deductible? Tax-free? We love to hear that! Health Savings Accounts (HSAs) are appealing since distributions from it are not subject to tax when used for qualified medical expenses. While that sounds great it is important to know the downsides as well as the upsides. Here is a list of HSA pros and cons.
- Contributions are pre-tax and are typically deducted from your payroll. They are not included in your gross income, and you do not have to pay federal income tax on them.
- Funds in an HSA may be invested in individual retirement accounts (IRAs) such as bank accounts, annuities, CDs, stocks, mutual funds or bonds. HSAs may not invest in life insurance contracts, or in collectibles (i.e., works of art, antique metal, gem, stamp, coin or other tangible personal property outlined in the IRS Code Sec. 408(m). However, HSAs may invest in certain types of bullion or coins. The HSA trust or custodial agreement may restrict investments to certain types of permissible investments.
- If you have funds left in your HSA account at year end, the fund will roll to the next year and be available for use without any penalty or stipulations.
- Should your circumstances changes like starting a new job, retiring or even switching your health insurance plan, the HSA account is still yours. A change in circumstance does not warrant a change in ownership of the account.
- A High-Deductible Plan (HDHP) is any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. The maximum annual deductible and other out-of-pocket expense in 2022 for a self-only plan is $7,050 and for family coverage $ 14,100. If you do not have a high-deductible health insurance plan or if you are eligible and enrolled in Medicare, you are not eligible to contribute to an HSA. If you anticipate having costly medical bills, it can be difficult even with an HSA, to afford the deductible. It can cause more of a financial burden.
- Should you need to withdraw money for non-qualified expenses, you will pay tax on the amount withdrawn in addition to a 20% penalty. If 65 years of age and older and you withdraw early, taxes will be owed but not the penalty.
- Keeping all receipts for document retention can be tedious. However, this is necessary in the case you are ever audited by the IRS.
- Some institutions charges fees on maintenance of the account or per-transaction. These fees can be waived under certain circumstances and typically are not exceedingly high.
While HSA accounts are intriguing and can be advantageous, it is nice to know the potential downfalls before jumping right in. If you have questions about HSA accounts and your personal situation, contact a Henry+Horne tax professional.