Save on Your Taxes with a Health Savings Account (HSA) [FAQ]

Health Savings Account (HSA), a tax-advantage savings plan for medical expenses, provides a great way to save on taxes. It is possible to use pre-tax dollars for your original contributions, have gains grow tax-deferred, and make withdrawals tax-free for qualifying medical expenses. A win, win, win!

To qualify for a Health Savings Account, you must have a High Deductible Health Plan (HDHP). A High Deductible Health Plan, typically, cost drastically less than other health insurance coverage. Also, many employers make High Deductible Health Plans even more tempting by contributing to employees’ Health Savings Accounts because they are saving money on the health insurance premiums as well with HDHPs.

Health Savings Account provides a great way to save money tax-free for the future. You do not lose the funds if you do not use them for medical expenses in the same year you contribute them like funds contributed to a Flexible Spending Account (FSA). You can carry them over year to year. Also, you can invest your HSA funds like you do your retirement funds in an IRA or 401(k).

How do I Qualify for a Health Savings Account (HSA)?

To qualify for a Health Savings Account (HSA), you must have a qualifying High Deductible Health Plan. To qualify as a High Deductible Health Plan, your health insurance deductible in 2019 must be $1,350 or higher for single coverage or $2,700 or higher for family coverage. For 2020, the health insurance deductible requirements increase to $1,400 or higher for self-only coverage and $2,800 or higher for family coverage. Also, the deductible must apply to all in-network benefits, including prescription drugs, except preventive care. Confirm with your health insurer it is an eligible High Deductible Health Plan.

If you are enrolled in Medicare, you do not qualify for a HSA. However, if you contributed to a HSA prior to enrolling in Medicare, you can take distributions tax-free for qualified medical expenses.

Each year, the IRS releases the qualifications for a HSA, including the requirements for the qualifying High Deductible Health Plan. Because the HSA qualifications change annually, you must confirm your eligibility each year.

How Much Can I Contribute to My HSA?

In 2019, if you have a HDHP, you can contribute up to $3,500 to an HSA for a single person HSA or up to $7,000 for a family HSA. In 2020, the contribution limits increase to $3,550 for a self-only HSA and $7,100 for a family HSA. If you turn 55 years or older in the year you qualify for a HSA, you can contribute an extra $1,000, catch-up contribution.

Your employer’s contributions to your HSA counts toward the maximum you can contribute.

Example. Ben and Rebecca have family coverage under a qualifying HDHP. Neither Ben nor Rebecca are 55 years old or older. Ben has the coverage through his employer, and his employer contributes $1,000 to their HSA plan.

In 2020, Ben and Rebecca would qualify to contribute $7,100 to their HSA. Because Ben’s employer contributed $1,000 to their HSA, Ben and Rebecca could contribute an additional $6,100 ($7,100 - $1,000). Rebecca could choose to contribute $3,550 to her own HSA, or she could contribute it to a separate HSA in her name.

How Long do I Have to Contribute to my HSA?

You can contribute to your HSA until the April tax deadline for the previous tax year. This means you can determine how the contribution will affect your tax liability before you make the contribution, as long as you file before the tax deadline. For tax year 2019, the deadline to contribute to a HSA has been extended until July 15, 2020.

When Should I Withdraw my HSA Funds?

When you should withdraw your HSA funds greatly depends on how you want to use your HSA. Of course, you can withdraw the funds tax-free when you need them for qualifying health expenses. If you need the funds for something other than qualifying medical expenses before age 65, you would owe income taxes and a 20% tax penalty. After you turn 65 years old, you can use the funds for whatever you want, you would just owe income taxes.

However, the HSA presents a unique vehicle to save tax-free savings to use during retirement in addition to funds saved in your retirement accounts. By investing your funds in your HSA like you would your retirement funds in your IRA or 401(k), you can continue to keep track of qualifying medical expenses you make over the years but not withdraw the funds from your HSA. Then when you retire, you can withdraw the amount you spent on qualifying medical expenses over the years and any other qualifying medical expenses during retirement.

The Bottom Line

HSAs provide a great tax advantage by allowing you to make tax-deductible contributions up to the maximum amount you are allowed annually, grow your investment tax-deferred, and make 100% tax-free withdrawals for qualifying medical expenses.

If you are not sure if you qualify for a HSA or want to know how much investing in a HSA, if you do qualify, would reduce your tax liability before contributing, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group. They will advise you how much your contribution will save you.