Health Savings Accounts (HSAs) are underutilized because many people don’t understand the nuances of these healthcare and tax tools. HSAs allow people with high-deductible health plans (HDHPs) to save up for medical expenses not typically covered by insurance, and they can also act as a retirement account. How could an HSA help your tax situation?
If you’ve maxed out your other retirement savings options, an HSA could help you out. Despite what the name of the account implies, HSAs are not required to be used for healthcare expenses. You can pay your medical expenses using other money and continue growing your HSA. If you withdraw money from an HSA to pay for something other than medical expenses, it will be taxable and could be subject to a penalty depending on your age. However, after the age of 65, the HSA will act the same as a traditional IRA and grant you taxable distributions that aren’t subject to a penalty. At any age, all withdrawals from an HSA to cover healthcare expenses are tax-free.
Are You Eligible?
In order to be eligible to put money away in an HSA in any given month, you must:
- Be covered by a HDHP on the first of the month
- Not be covered by another healthcare plan
- Not be entitled to Medicare benefits
- Not be claimed as a dependent on a tax return
Unlike traditional IRA retirement savings plans, there is no need for someone to be employed, and there are no exclusions for taxpayers with higher incomes. Anyone can make a contribution to an HSA on someone’s behalf, including employers, family members and others. Anyone who makes additional HSA contributions can take above-the-line deductions and skip itemization for the contributions.
Are You Eligible for a HDHP?
To be eligible for a HDHP, you must meet the qualifications in the table below:
|Minimum Annual Deductible||Maximum Annual Out-of-Pocket Expenses|
Using the table above, make sure that your minimum annual deductible is equal to or greater than the amount in the chart and that your maximum annual out-of-pocket expenses also exceed the figure listed for the year. If you meet both of those requirements, the plan is considered an HDHP.
How Can You Set Up an HSA?
If you’re eligible, you can create an HSA through any HSA trustee or custodian in the same way that you would set up an IRA. If you are employed, you can set up an HSA with or without employer involvement.
Discuss the advantages of an HSA with Miles Tax Advisory
We can work you through all of your options and help you determine the best retirement savings plan for you. We are always here to assist you!