Get to Know Health Savings Accounts
Pay for medical expenses and save for retirement using a tax-advantaged Health Savings Account.
Laura Adams, MBA
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Get to Know Health Savings Accounts
In today’s episode I’m going to discuss how to pay for medical expenses and save for retirement using a tax-advantaged health savings account.
Health Savings Accounts are extremely flexible savings vehicles that offer many advantages. Called HSAs for short, these programs are available for United States taxpayers to provide a tax advantage that offsets our growing health care expenses.
First, I’ll discuss who is qualified to have an HSA, then I’ll explain more about the specifics of HSA’s, how you open one, and the benefits.
Qualifying
To qualify for a Health Savings Account, you must meet the following five requirements:
- You must be 18 years of age.
- You must have a high-deductible health plan, or HDHP (more details about these in a moment).
- You cannot have any general health coverage other than a high-deductible health plan.
- You must not be enrolled yet for Medicare benefits.
- You cannot be claimed as a dependent on someone else’s 2007 income tax return.
If you meet these five criteria, congratulations, you’re eligible to have a Health Savings Account! And if you’re not eligible right now, stay with me, because you might become eligible in the future.
Deductibles
So, what’s considered a high-deductible health plan? Well, it’s exactly that–it has a higher than typical annual deductible. A deductible is the maximum amount of out-of-pocket medical expenses that you would pay during the year before your insurance takes over.
High deductibles mean lower monthly premiums. So high-deductible plans can be the logical choice for you or your employer as the cost of health insurance steadily rises.
Opening an Account
If you qualify to have an HSA, it’s easy to open one up. This is done through a qualified HSA trustee which could be a bank, an insurance company, or anyone who is already approved by the Internal Revenue Service to be a trustee of IRAs.
Deposit Limits
You may be wondering how much you can deposit into a Health Savings Account each year. Well, the maximum amount that can be contributed for the 2008 tax year is $2,900 for an individual policy and $5,800 for a family policy. If you’re age 55 or older, there is a catch up policy that allows you to contribute an extra $900 a year to either an individual or family policy.
Rollover Opportunity
If you’re qualified to have an HSA, but still haven’t opened one, I really want to encourage you to do it. The program offers a great once-in-a-lifetime funding opportunity to open your HSA using money you may already have saved in your IRA.
The trustee of your IRA simply transfers the money to the trustee of your new HSA. This distribution is not included in your income nor is it tax deductible. You can also rollover funds from other types of qualified medical savings accounts into HSAs.
Benefits
There are many benefits you’ll enjoy when you have an HSA. Consider the following 8 advantages:
- Contributions that you make to the account, up to the legal limit, are tax deductible
- Any contributions made by your employer are excluded from your gross income, so you get to spend them as pre-tax dollars
- All contributions remain in your account indefinitely, until you choose to use them — there’s no penalty if you don’t use the money
- Interest you earn on the account accumulates over the years tax-deferred, and if used to pay for qualified medical expenses is tax free
- Withdrawals used to pay qualified medical expenses for you, your spouse, and your dependents are never taxed
- The account is portable, which means that you’ll always own the account even through life changes such as marriage, divorce, changing jobs, being unemployed, retirement, moving out of state or out of the country, changing your insurance provider, or even becoming uninsured
- Paying for qualified expenses directly from your HSA is very convenient; most institutions offer checks, a debit card, and even online banking
- And lastly, the money you save in your HSA will be there to pay for qualified expenses in the event of job loss, unexpected health needs, or to bridge the gap between retirement and the start of Medicare benefits.
Qualified Medical Expenses
Funds in an HSA are meant to be used for payment of current and future qualified medical, dental, and vision expenses that are not covered by the high-deductible health plan. There are many qualified expenses, and some that you might not expect, like acupuncture, bandages, capital expenses for home improvements related to medical needs, addiction therapy, and lead-based paint removal!
Check out the complete list of qualified medical expenses in IRS Publication 502. You’ll find a link to this document in the show notes – and remember you can search for any IRS topic at irs.gov.
Be aware of something very special about HSAs. Even though non-prescription medicines are not considered a qualified medical expense for deduction from income taxes, non-prescription medicines do qualify as valid expenses for HSA purposes!
So think about the beauty of being able to pay for eligible over-the-counter medications with pre-tax money. This could include items such as antacids, allergy medications, pain relievers, cold and cough medicines, first aid ointments, motion sickness pills, etc.
According to the U.S. Department of the Treasury website, a qualifed medical expense must be “primarily for the prevention or alleviation of a physical or mental defect or illness”. This means you cannot use HSA funds to pay for items that would be considered toiletries such as toothpaste or cosmetics.
If you use your HSA money to pay for anything other than qualified medical expenses, the money will be taxed as income, plus be subject to a 10% tax penalty. This penalty is waived if you’re 65 years of age or older or are disabled. So if you have remaining funds in an HSA at age 65, they can be used for retirement, penalty-free. Remember that any non-qualified expenses would still be subject to regular income tax.
I hope the benefits I’ve reviewed will encourage you to investigate more about HSAs or to have a goal to invest the annual maximum if you already have one. Think about HSAs as a way to pay medical bills with tax free money AND a way to save for retirement all wrapped up in one great program!
Can you pay insurance premiums with HSA funds? Find out in this Quick Tip.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.