Balancing Rising Health Care Costs
“To keep your balance when faced with mounting medical expenses, a health savings account (HSA) may be a viable tool for you.”
With its financial benefits and various features, you will not only have protection against major healthcare costs, but a potential reservoir of tax-deferred savings, if you don’t need the HSA assets for medical expenses. Learn more about HSAs and if you are eligible for one below.
- Savings tool with investment earnings
- Flexibility to pay for current medical expenses or save for future needs
- Tax deductible contributions
- Tax-deferred earnings
- Tax-free distributions if used properly
- Balance carries over year to year
- Remains with you regardless of change of coverage or employment
“You must meet certain requirements to be eligible for an HSA; most importantly, you must be covered under a High Deductible Health Plan (HDHP).”
An HDHP generally has lower premiums, but higher deductibles compared to other health plans. Until your deductible is met, you must pay for all your medical expenses, except for preventative care which is almost always covered. Assuming your HDHP is HSA compatible, you can use your HSA to pay for all of these expenses.
An HDHP is considered HSA compatible if it satisfies the annual deductible and out-of-pocket expense limits. Check with your health insurance provider to see if your health plan meets these requirements.
Except for limited exceptions, you will not be eligible for an HSA if you are covered by another health plan.
If you are enrolled in Medicare, you are not eligible.
You are also not eligible if you are claimed as a dependent on another person’s tax return.
Note: Your HSA eligibility is determined as of the first day of each month.
- Pay your medical expenses with tax-free HSA contributions.
- Make tax deferred HSA contributions.
- Pay higher deductibles (when you have medical expenses).
- Pay lower premiums with an HDHP.
You can withdraw money from your HSA tax-free if the money is used to pay for qualified medical expenses as permitted under federal tax law. This includes most medical, dental, and vision care. While health insurance premiums generally are not included, the premiums you pay for qualified long term care insurance, health insurance when unemployed, health insurance under COBRA, continuing health coverage, and certain health insurance premiums after age 65 are.
You can use your HSA for medical expenses for yourself as well as your spouse, and any dependents, even if they are not covered by the HDHP. Or you can use your HSA for retirement. Keep in mind, however, that HSA distributions not used for qualified medical expenses are subject to ordinary income tax, and if taken before age 65, a 20 percent IRS penalty tax (unless due to death or disability).
HSA contributions are generally tax-deductible, and you can fund your HSA up until April 15.
Keep in mind there are contribution limits:
- Contribution limits are dependent on whether you have “self-only” or “family” coverage (2014 contributions: self-only HDHP coverage up to $3,300, family up to $6,550)
- There are increased contribution limits after the age of 55 (2014 catch up contributions: $1,000)
- Note that many banks, credit unions, and investment houses offer health savings accounts. Be sure to shop around to find the lowest fees*.
This article gives a general overview of health savings accounts. For more detailed information, contact your financial advisor, tax professional, or the IRS.