For the calendar year 2017, you can contribute an HSA maximum of $3,400 for an individual and $6,750 for a family. Savers aged 55 and over can make an optional catch-up contribution of up to $1,000 each year.
The Low-Down on HSAs
A Health Savings Account is a savings account you use for healthcare expenses a bit like a medical IRA. It works hand-in-hand with healthcare insurance to help you meet your out-of-pocket medical expenses such as deductibles and medical costs not covered by your health plan. You can open an HSA through your health insurance broker, such as Zenefits, or through many banks and financial institutions. HSAs have tax-free contribution limits that may vary by year and restrictions on eligibility.
Advantages of an HSA
The major advantage of an HSA is that it is treated favorably for tax, so:
- You don't pay tax on contributions up to the maximum annual contribution limit. Depending on your employer's plan, you either deduct your HSA contributions from your taxes or your employer takes contributions directly from your paycheck before taxes are applied.
- Interest you earn on the account is tax-free.
- You can withdraw money from your HSA to pay just about any kind of healthcare expense, and you don't pay tax on these withdrawals.
- You can use the HSA to pay for medical expenses for your spouse or a dependent without tax penalty.
- Once you reach the age of 65, you can withdraw money from the HSA for non-medical expenses, also tax-free.
All in all, depositing cash into an HSA can save a fair chunk of taxes, as this calculator shows.
What's the Drawback?
There's really only one drawback to an HSA. Just remember, it must be paired with a high-deductible health plan (HDHP). An HDHP is a plan with lower premiums but a relatively high annual deductible, the amount you pay out of your own pocket before your insurance kicks in, as determined by your insurance provider.
In 2017, the IRS defines an HDHP as a plan with a minimum annual deductible of $1,300 for individuals. For families, the minimum deductible is $2,600. The maximum permissible deductible, along with other out-of-pocket expenses, is $6,550 for individuals and $13,100 for family coverage. Policies with deductibles outside these ranges do not qualify as an HDHP, so if you belong to one of these, you are not eligible to open an HSA. You also won't be eligible to open an HSA if you're enrolled in Medicare or any other non-compatible plan, or if someone can claim you as a dependent on their tax return. In a nutshell, HSAs provide a tax-advantaged way of saving for those pesky current and future health care costs.
One Fun Fact About HSAs
Parents, spouses and even friends can contribute; so, now's your chance to cash in on having a friend with benefits!