insurance

How to Qualify for a Health Savings Account and Trim Your Tax Bill

Health savings accounts provide a triple tax break to consumers. Contribution limits are going up slightly in 2018, but so are deductibles for eligible policies.

Question: I'm choosing my health insurance policy for 2018 during open enrollment now. How high does my policy deductible need to be to qualify for a health savings account in 2018, and how much can I contribute for the year?

Answer: An HSA-eligible health insurance policy must have a deductible of at least $1,350 for individual coverage or $2,700 for family coverage in 2018, up slightly from $1,300 for individuals and $2,600 for families in 2017. You can contribute up to $3,450 to a health savings account in 2018 if you have individual coverage, or $6,900 if you have family coverage. You can also contribute an extra $1,000 if you're 55 or older. (You can add the extra $1,000 anytime in 2018, even if your 55th birthday is later in the year).

Before you choose a policy for 2018, ask the insurer if it's HSA-eligible—not all high-deductible policies qualify. For example, some policies have a lower deductible for prescription drugs, making them HSA-ineligible.

For more information about choosing a health insurance policy for 2018 during open enrollment, see 10 Things You Need to Know About Health Insurance Open Enrollment.

If you do have an HSA-eligible policy, contributing to a health savings account should be one of your top savings priorities, after contributing to a 401(k) up to any employer match. You'll get a triple tax break from an HSA. Your contributions are pretax if made through your employer or tax-deductible if made on your own. The money grows tax-deferred in the account. And you can use it tax-free for medical expenses in any year. You can use the HSA money to pay for deductibles, co-payments, prescription drugs, and out-of-pocket costs for vision, dental and other care.

Unlike flexible-spending accounts, HSAs don't require you to use the money in the account by the end of the year. In fact, you'll get the biggest tax benefit if you can afford to use other money for current medical bills and let the money grow in the HSA for future expenses. (Many HSAs let you invest money in mutual funds for the long term.) After you sign up for Medicare, you can no longer make new contributions to an HSA, but you can use the money for out-of-pocket medical expenses as well as for Medicare Part B, Part D and Medicare Advantage premiums.

And if you currently have an HSA-eligible policy, you have until April 15, 2018, to contribute to an HSA for 2017. The contribution limits are currently $3,400 for individual coverage or $6,750 for family coverage.

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