In recent times, we have seen an explosion of activity regarding Health Savings Accounts (HSAs). In 2006, total HSA assets were valued at roughly $1.7 billion, and as of January 2017 they’re estimated to be $41 billion. The most intriguing aspect of these accounts is that the contributions are both tax-deductible and tax-free. The only requirement to remain tax free is that the funds you withdraw must be used for qualified medical expenses.
- Tax-free – Contributions made to your account are tax-free if they are made by pre-tax dollars, and tax-deductible if the contributions are made by after-tax dollars. Assets in your account may also earn interest or other earnings with no tax consequences.
- Rollover – Contributions are limited on an annual basis. However, unused assets build up with no expiration, with the accumulated value rolling over year after year.
- Income – Contributions made to your HSA by your employer or other contributors are excludable from your net income.
- Transitions – Your HSA is considered “portable” by the IRS. This means when you get a different job or become unemployed, your HSA remains with you.
- You must have a high-deductible health insurance policy – $1,300 and up for individuals, and at least $2,600 for families. If you are receiving Medicare or do not have high-deductible health insurance, you do not qualify for a HSA.
- Early withdrawal penalties – If you withdraw funds and use them on non-qualified expenses before the age of 65, you owe the taxes on the amount withdrawn AND an additional 20% penalty. Over age 65, you owe tax for non-qualified expenses, but not the 20% penalty.
- Maintenance and fees – In case of an audit, you should always keep evidence that funds withdrawn were used for qualified expenses.
- Fees – Some institutions may charge usage fees such as transaction fees and/or account maintenance fees.
Even with some negative aspects, HSAs are quickly becoming a popular means to save and grow your money.
Regarding the annual limits for 2017, an employer or other contributor can put in up to $3,400 for individuals and up to $6,750 for families. If you are an account holder and at least 55 years old, you are allowed to contribute an additional $1,000 per year. For 2018, the IRS just announced those limits will go up by $50 for individuals to $3,450 and $150 for families to $6,900.
However, we may see even more change. The House recently passed the American Health Care Act (AHCA) which would potentially double the allowable contribution amount to at least $6,550 for individuals and $13,100 for families. Under the AHCA, HSAs could also become more flexible in regards to what is considered “qualified medical expenses,” possibly including over-the-counter medications, as well as lowering the 20% penalty for early, non-qualified expense withdrawals.
With long-term savings and post-retirement health care in mind, Health Savings Accounts are a wonderful utility to maximize tax advantages and cultivate long-term stability and growth.