For many people tax time is the only time of the year when they think of tax planning and opportunities to save money. But as the year comes to a close, it’s a good time to remember the benefits of a Health Savings Account (HSA). A HSA is a personal savings account that allows individuals to pay for current health expenses and save for future qualified medical expenses on a pre-tax basis.
You can treat your HSA like an individual retirement account (IRA) for health care. Funds deposited into a HSA are not taxed, the balance in the HSA and interest grows tax free, and that amount is available on a tax-free basis to pay your qualified medical expenses, including your copays, coinsurance and deductible. You can also use the funds anytime to reimburse yourself for any qualified medical expenses that your insurance didn’t cover, and you had to pay out of pocket.
HSA Tax Advantages
HSAs have a triple-tax advantage because they are:
- Tax-deductible—Contributions to the HSA are 100% deductible (up to the legal limit)—just like an IRA.
- Tax-free—Withdrawals to pay qualified medical expenses, including dental and vision, are never taxed.
- Tax-deferred—Interest earnings accumulate tax-deferred, and if used to pay qualified medical expenses, are tax free.
Besides the tax advantages, HSA accounts also offer these unique benefits:
- Portability—You own your HSA and the money in it. The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, go to work for a different employer, or retire.
- Annual Rollover—It’s not a “use it or lose it account.” Unlike a flexible spending account (FSA), unused money in your HSA isn’t forfeited at the end of the year. It rolls over to the next year and continues to grow tax-deferred.
- Others can Contribute—Anyone, including your employer, can deposit money in your HSA, up to an annual limit set each year by the IRS.
Who is Eligible for a HSA?
To open a HSA, you must be covered by a high-deductible health plan (HDHP). A HDHP typically offers lower monthly premiums but has higher annual deductibles and out-of-pocket maximum limits than a traditional health plan.
To be HSA-eligible, you must not be covered by another health plan, enrolled in Medicare or in receipt of Veteran’s Administration (VA) benefits within the last three months, or covered by your own or your spouse’s flexible spending account (FSA) and not be claimed as a dependent on someone else’s tax return.
Take the Next Steps
Is a HSA right for you? Everybody’s situation is different but HSAs allow three, tax-free ways to save for health expenses. If you need funds today, an HSA may be an attractive choice because withdrawals to pay for qualified medical expenses are never taxed. If you want to save for future health care expenses, or if you are near retirement, an HSA may make sense because the money can be used to offset the costs of medical care after retirement. By emphasizing the “savings” feature of a HSA, your funds will grow and compound tax free. The IRS has more information on HSAs and other programs designed to give you tax advantages to offset health care costs.
Whichever way you choose to use your HSA, enrolling in a Christian Brothers Employee Benefit Trust (CBEBT) HDHP HSA-qualified plan is the first step for you to be eligible to open a Health Savings Account.