Many of us have heard about Health Savings Accounts (HSA), but are not sure how they work or what their role is in your financial picture.
Opening a health savings account can offer a triple tax advantage. But to qualify, you must be in a high-deductible health insurance plan (HDHP) through your employer and you cannot participate in any other health insurance plans.
This is what we mean by a triple tax advantage:
- Contributions are tax-deductible.
- Any interest and earnings grow tax-deferred.
- Distributions are tax-free when used for qualified medical expenses.
These accounts were created to help people in HDHPs pay for current medical expenses, but the money saved in HSAs can also be used for healthcare or other expenses in retirement.
Unlike flexible spending accounts, there is no ‘use it or lose it’ provision. Any money left in an HSA at the end of the year belongs to the account owner and remains in the account, growing tax-deferred, until it is distributed.
An individual can contribute up to $3,400 to an HSA in 2017, and a family can contribute up to $6,750. If you’re age 55 or older, you can make a catch-up contribution and save an additional $1,000 in your HSA each year. The money in your HSA account is yours if you change employers. Most HSAs offer investment options, so you can grow your savings tax-deferred over a long period of time, if you don’t use the money for medical expenses.
Even if you stay healthy well into retirement, at age 65, the money in an HSA can be used to help pay Medicare premiums tax-free or be withdrawn as a taxable distribution for any non-medical purpose, similar to an IRA distribution.
Saving in an HSA gives participants in HDHPs opportunities to set aside pre-tax dollars, grow any earnings tax-deferred and pay no taxes on distributions, as long as they’re used for qualified medical expenses. It’s a win-win-win opportunity.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.