HSA's a Hidden Gem?
Health Savings Accounts, or “HSA’s”, have been around for years, but we are starting to see them become more popular given the changes in health insurance recently. These accounts can be a great tool for saving more money for retirement, especially to fund medical expenses. Here are some important things to know about HSA’s:
What is a Health Savings Account, or HSA?
An HSA allows someone with a high deductible insurance plan to put away pre-tax money to be used on qualified medical expenses.
Is an HSA the same as a Health Flexible Spending Account (FSA)?
No! This is a common point of confusion and we often have clients tell us they contributed to an HSA when in fact it was an FSA. There are many differences between the two types of accounts but the biggest is that money contributed to an FSA must be used so it can’t be kept in the account and saved for retirement. Funds in an HSA can stay there forever and will always be yours, even if you leave your employer. This means you have a lot of flexibility with an HSA plan and it allows you to use them as another form of tax-advantaged savings account.
Who can contribute to a HSA?
Anyone who meets all of the following conditions can contribute to an HSA:
- Covered by a high deductible health plan ($1,250 for individuals, $2,500 for families)
- Not covered by another health plan
- Not eligible to be claimed as a dependent on another person’s tax return
- Not entitled to Medicare benefits
How much can I contribute to an HSA?
If you are single you can contribute up to $3,300 in 2014, but if you are married that number goes up to $6,550. These limits increase to $3,350 and $6,650 in 2015. If you are over 55 you can contribute an additional $1,000.
Do I get a tax deduction?
Yes, you can deduct your contributions from your taxable income on your tax return.
How are withdrawals taxed?
Any withdrawals used directly for medical expenses come out tax-free. If you use the funds on non-medical expenses before age 65, they will be subject to tax AND a 20% penalty. If you are over 65, there is no penalty for non-medical withdrawals but you will owe tax on the amount of the distribution.
What qualifies as medical expenses?
The list of qualified expenses is extensive but can be seen in IRS Pub 502 under “What Are Medical Expenses?” on page 2.
What can I do with the money I contribute to an HSA?
The options available to you will vary depending on where you set up the account but most places allow you to keep the money in cash or invest in a number of mutual funds. Keep in mind if this money is being invested for the long-term you should look at how the asset allocation fits with your overall portfolio.
An HSA can be an excellent way to get more money into tax-deferred savings for retirement if you are already maximizing your other retirement plan contributions. If you’d like to learn more about these accounts and whether one might make sense for you, contact us today!
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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