If you’ve been wondering why there’s so much fuss lately about health savings accounts, you’re not alone.
After all, they’re not exactly new. Health savings accounts (or HSAs) were created in 2003 so individuals covered by high-deductible health plans could receive tax-preferred treatment on money saved for medical expenses.
But with constant changes to health care coverage, including an increase in the number of high-deductible policies available, HSAs are growing in popularity. More companies are offering access as part of their employee health coverage. And the Republican-led Congress wants to give HSAs an even bigger role in health care reform; this year, it proposed contribution limits that are nearly double what they are now. (The 2017 contribution cap is $3,400 for individuals and $6,750 for family coverage, with a $1,000 per year catch-up contribution for those over age 55.)
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The triple tax advantages to an HSA:
- The money you or your employer deposit in the account is deductible on your tax return (or entirely pre-tax if you contribute to your HSA via payroll deduction).
- The money in your account grows tax-free.
- You aren’t taxed on the money when you withdraw it, as long as you use it to pay for qualified medical expenses, including dental, vision and even over-the-counter medications, if your doctor writes you a prescription.
So you can see the appeal.
There are several ways to access your HSA funds. Many plans use a debit card, some offer a checkbook and some allow for reimbursement. Withdrawals can be made for any reason, but if the money isn’t used for approved medical costs, there is a 20% penalty and those withdrawals are taxed as income. (The penalty is waived for those 65 and older, or who have become disabled.) All HSA participants are required to retain documentation of their qualified medical expenses.
After setting up your HSA plan, adding money is pretty straightforward. You can send checks directly, you can do a payroll deduction, or you may have an employer-funded HSA. You can even do a 100% tax-free one-time “rollover” of an IRA into your HSA, as long as the size of the rollover does not exceed your annual allowable contributions.
Another advantage of an HSA is that earned income is not a requirement. To qualify, you must have an eligible health insurance policy with a high deductible, meaning $1,300 for individuals or $2,600 for family coverage.
After you sign up for Medicare, you can no longer make contributions to your HSA, but you can continue to use the money that’s already in the account tax-free for uninsured medical expenses and for some Medicare premiums.
If you’ve passed on opening a health savings account in the past because it just seemed too complicated or you were confused about the benefits, take another look. The trifecta of tax advantages, ease of use and continued access into your retirement years makes it worth considering an HSA as part of your overall retirement plan.
Kim Franke-Folstad contributed to this article.
-
What’s the New 2026 Estate Tax Exemption Amount?Estate Tax The IRS just increased the exemption as we enter into a promising tax year for estates and inheritances.
-
The Economy on a Knife's EdgeThe Letter GDP is growing, but employers have all but stopped hiring as they watch how the trade war plays out.
-
Financial Fact vs Fiction: The Truth About Social Security Entitlement (and Reverse Mortgages' Bad Rap)Despite the 'entitlement' moniker, Social Security and Medicare are both benefits that workers earn. And reverse mortgages can be a strategic tool for certain people. Plus, we're setting the record straight on three other myths.
-
The End of 2%? An Investment Adviser's Case for Why the Fed Should Raise Its Inflation TargetYes, inflation can be tough on those living on fixed incomes, but protecting us from it too strictly could do our overall economy more harm than good.
-
Medicare Open Enrollment: Why You Need to Pay Extra Attention to Part D, From a Financial AdviserThe lowest premium for prescription drug coverage might not actually save you the most money. Make sure you take copays into consideration and do the math.
-
How the One Big Beautiful Bill Will Change Charitable GivingTaxpayers who don't itemize will be able to take a bigger deduction for donations, which could boost giving. However, high-income donors could see their tax benefits reduced.
-
A 'Fast, Fair and Friendly' Fail: Farmers Irks Customers With Its Handling of a Data BreachFarmers Insurance is facing negative attention and lawsuits because of a three-month delay in notifying 1.1 million policyholders about a data breach. Here's what you can do if you're affected.
-
Serving the HNW Market: How Financial Advisers Can Break Through and Deliver Lasting ValueFinancial advisers have a significant opportunity to serve high-net-worth clients by elevating their capabilities, delivering comprehensive planning, building diverse teams and prioritizing family wealth education.
-
Don't Just Sell, Connect: How Financial Advisers Can Ignite Their Sales GrowthAvoid complacency and embrace small, consistent improvements to optimize your sales process and results.
-
Are You a Small Business Owner Buckling Under Economic Pressure? Here's How You Can CopeSignificant emotional and financial challenges, including tariff worries, are piling up on small business leaders. Here's how leaders can develop more healthy coping strategies and systems of support.
