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Everything You Need to Know About Health Savings Accounts

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If you feel that your cost for health insurance is too high, you’re definitely not alone: A recent Gallup poll found that 42% of Americans are “dissatisfied” with the amount they pay for their coverage. To help offset the costs and help Americans avoid crippling medical debt, the federal government offers tax relief for those with high-deductible plans if they choose to open a Health Savings Account to set aside funds to pay for medical costs. A Health Savings Account (HSA) might be just the thing to help alleviate your financial pain, but you’ll first need to qualify for the program.

What Is an HSA?

An HSA is a dedicated savings account created in 2003 to help people with high-deductible health insurance plans afford their medical bills. It is not the same thing as a Flexible Spending Account (FSA), an employee benefit that allows you to set aside pre-tax dollars to cover medical spending. Notably, an FSA is a “use it or lose it” plan: If you don’t spend the funds you had deducted from your paycheck by the end of the plan year, you forfeit the money.

An HSA, on the other hand, can be set up by an individual or by an employer, and the money you contribute is yours to keep for life. Like FSAs, HSAs provide tax benefits; however, HSAs are not available to everyone.

Who Is Eligible for an HSA?

HSAs are available exclusively to people who are insured under a high-deductible health plan. These plans may be offered by their employers or purchased individually. As of tax year 2015, IRS rules state that a high deductible must be at least $1,300 for individual coverage or $2,600 for a family plan. If your deductible meets those minimums, you can open an HSA.

Are HSA Contributions Tax Deductible?

Yes. Contributions to your HSA can be deducted from your taxes, even if you opt for the standard deduction instead of itemizing. This will reduce the amount of money you need to pay taxes on and will either lower your overall tax bill or increase your refund. If your employer takes HSA contributions directly out of your paycheck, those funds are considered pre-tax dollars and result in the same tax savings.

Are Distributions From an HSA Taxable?

Maybe. When you use funds from your HSA to pay for qualified medical expenses, you will not pay taxes on the money you withdraw. You may use the funds immediately or wait for years before dipping into your HSA account to pay your doctor’s bills. You will also not pay taxes on any interest earned in your HSA account if it is used to pay medical expenses.

Once you reach age 65, you may withdraw funds without penalty to pay for anything. If you use the money for non-medical expenses, however, you’ll be expected to pay income tax on the money. For many people, this will still result in tax savings, as most retirees are in a lower tax bracket than they were while they were working, and won’t be charged as much on the money as they would have been in their prime earning years.

Are There Limits to HSA Contributions?

Yes. For tax year 2017, savers with an individual health plan can contribute a maximum of $3,400. Those with a family plan can contribute up to $6,750 for the year. For anyone over the age of 55, those limits are increased by $1,000 per year.

Are HSAs Connected to the Affordable Care Act?

Not exactly. HSAs were first offered in 2003 under President George W. Bush. Although each year changes are made to the contribution limits and deductible requirements, changes in the Affordable Care Act (also known as “Obamacare”) would not necessarily have an impact on these accounts.

How Does an Individual Open an HSA?

If your employer doesn’t offer an HSA plan as part of your benefits package, or if you buy insurance on your own, you can open an HSA with any HSA bank as long as your health plan qualifies. It’s always a good idea to shop around for the best interest rates and lowest fees to make the most of your investment.


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