Updated October 7, 2022
Health Savings Accounts, or HSAs, offer some of the best tax advantages among savings and retirement accounts. High earners should seriously consider opening and contributing to an HSA.
First things first - to be eligible to make an HSA contribution, you must be enrolled in a high-deductible health plan (HDHP). When you shop for health plans in your annual enrollment period, look for that HDHP designation. For 2022, HDHPs have a minimum annual deductible of at least $1,400 ($2,800 for family coverage) and a maximum out-of-pocket expense of $7,050 ($14,100 for family coverage).
Other eligibility requirements include not having any additional health coverage, not being enrolled in Medicare, and not being claimed as a dependent on someone else's tax return.
Bottom line: HDHP plans will generally have lower monthly premiums than plans with similar coverage but lower deductibles; beware that this means you - the insured - will be responsible for covering more health care costs out of pocket. That's where the HSA comes in.
HSA Contribution Limits
For 2022 - someone with individual health coverage can contribute $3,650, while someone with family coverage can contribute $7,300.
Those age 55 or older (but not yet enrolled in Medicare) may contribute an additional $1,000. Therefore, if both spouses in a family are eligible and over 55, the maximum family contribution becomes $9,300. If one spouse carries the family coverage, the other (if 55 or older) can still get a $1,000 catch-up contribution. But this spouse must put the money into his or her own HSA, as accounts are individually owned.
Tax Benefits To Make CPAs Drool
HSAs are sometimes described as triple tax-advantaged. Here's why:
- Eligible contributions to an HSA made by the individual (not by the employer) are deductible from gross income, reducing taxable income (even if you can't itemize deductions).
- The investment income (interest, dividends, capital gains) earned within the HSA is not taxed.
- So long as withdrawals are used to pay for Qualified Medical Expenses (see IRS Publication 502), withdrawals are not taxed either.
Common HSA Questions
What happens if you don't spend the money?
If you remain healthy and are fortunate enough to accumulate savings in your HSA, you don't have to use the funds each year. They stay in the account and hopefully continue to grow until you do need them. This is a big contrast to a Flexible Spending Account (a similar employer-sponsored benefit sometimes confused with the HSA), where participants have to "use it or lose it" each year.
Even if you become no longer eligible to contribute to an HSA (for example, if you switch health plans or enroll in Medicare), you can still use HSA funds to cover qualified medical expenses. One of the best use cases for HSAs is to accumulate savings to cover the surprisingly high healthcare costs in retirement. Fidelity estimates lifetime, post-retirement health care costs for an average couple at $295,000.
What happens if you withdraw money from your HSA for something other than a qualified medical expense?
The withdrawal is taxable income, but there is no penalty. Meanwhile, you've still got the initial tax deduction and tax-free investment income. Note that HSA dollars can reimburse a wider variety of costs than insurance typically covers. For a list of eligible healthcare expenses, see IRS Publication 502.
Are HSA deductions recognized for state income taxes?
In most states, yes. California and New Jersey are two states that don't recognize HSA deductions. Be sure to check with your tax advisor to understand the benefits of your situation.
Should You Open an HSA?
Understanding the pluses and minuses of enrolling in a high-deductible health plan and contributing to an HSA can be complicated. You might have questions about whether it makes sense to prioritize saving in a 401k (where you might receive a matching contribution) or an HSA. A financial advisor can help you make the right decision within the context of your overall spending and savings.
Still confused? We're here to help.
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