Health Savings Accounts (HSAs) became available in 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act, HSAs allow people with High Deductible Health Plans* to pay for current healthcare expenses and save for future expenses on a tax-favored basis It is a tax-exempt trust or custodial account you set up with a qualified trustee to pay or reimburse certain medical expenses you incur. To be eligible to contribute to an HSA you must be covered under a High Deductible Health Plan*, have no other health coverage, not be enrolled in Medicare and cannot be claimed as a dependent on someone else’s tax return.
* In 2018 a High Deductible Health Plan has a minimum deductible of $1,350 for an individual and $2,700 for a family with a maximum deductible of $6,650 individual and $13,300 family.
You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. The contributions remain in your account until you use them. The interest or other earnings on the assets in the account are tax free. Distributions may be tax free if you pay qualified medical expenses. An HSA stays with you if you change employers or leave the work force.
You, your employer, or both may contribute to your HSA in the same year. For an HSA established by a self-employed individual, the individual can contribute. Family members or any other person also may make contributions on behalf of an eligible individual. Contributions to an HSA must be made in cash. For 2018, if you have individual HDHP coverage, you can contribute up to $3,450. If you have family HDHP coverage, you can contribute up to $6,900.
When you turn 65 and enroll in Medicare you can no longer make contributions to your HSA, but you can continue to use funds from the HSA to pay for qualified medical expenses without incurring tax on the withdrawals. Qualified medical expenses include dental, vision, long-term care insurance premiums (up to a limit) and even your Medicare Part B Premiums.
An HSA can be a great choice for people who wish to limit their upfront health care costs while saving for future expenses. HSAs go with HDHPs, where monthly premiums are generally lower than other health plans. In addition, favorable tax treatment means you may owe less in taxes on your tax return. Additionally, an HSA may allow you to use pre-tax dollars for items your employer’s insurance options don’t cover, such as eyeglasses.
When deciding if an HSA is appropriate for your situation you will need to consider your health coverage options, your expected use of your health insurance, your other savings options, and your current and expected tax situations. Talk to your Lake Tahoe Wealth Management financial planner today if you have the option to use a Health Savings Account.
