Like IRAs and 401(k)s, the HSA contribution limits are pegged to inflation and can rise from year to year. And given the fantastic advantages that a health savings account can offer, it's definitely a good idea to max out those contribution limits. So I'm happy to say that the HSA limits for 2018 have gone up compared to the 2017 limits.
What is an HSA?
A health savings account, or HSA, is a tax-advantaged account designed to be paired with a high deductible health insurance policy. The HSA allows its holder to tuck away the money he may need for medical expenses, and provides a triple tax advantage: HSA owners get a tax break on the money they contribute to the account, the contents of the account are exempt from capital gains and other investment taxes, and any money taken out to pay qualified medical expenses is also not taxed.
HSA contribution limits
There are two different sets of contribution limits for HSAs: one for account holders with self-only coverage (meaning that the high deductible health insurance policy paired with the HSA provides coverage only for the individual holding the account), and another for account holders with family coverage.
For 2018, the contribution limit for self-only HSAs is $3,450 per year. The contribution limit for family coverage HSAs is $6,900 per year. If you're age 55 or older, you can make an additional $1,000 catch-up contribution to your HSA. Contribute more than the annual limit and you'll be charged an extra 6% tax on the excess, plus you won't be able to deduct those over-limit contributions. You can avoid the 6% penalty by withdrawing the excess contribution -- and any earnings (i.e. interest) on the extra money -- by the date on which your tax return is due, typically April 15 of the following year. You'll also need to declare any earnings you withdrew on your Form 1040 as "other income."
Health insurance requirements
If you want a health savings account, not just any old health insurance policy will do. You'll have to get an HSA-compatible high deductible health insurance policy. In order to qualify in 2018, your health insurance policy must have a deductible of at least $1,350 per year for self-only coverage, or $2,700 per year for family plans. Also, annual out-of-pocket expenses on your policy cannot exceed $6,650 for self-only plans or $13,300 for family plans. Finally, the insurance policy must be HSA-compatible, meaning that the plan's providers have agreed to meet reporting and other requirements for health savings accounts.
How to use your HSA
Once you have both an HSA-compatible health insurance policy and the account itself, you can start funding your HSA. Because the tax benefits that these accounts offer are so extraordinary, it's a good idea to contribute as much money as you can to the account. Even if you don't end up spending it all on medical expenses, once you turn 65 you can use any money in the account for any purpose at all -- which makes your HSA a kind of supplementary retirement account as well as a healthcare funding account. At the very least, keep at least enough in your HSA to cover a full year's deductible on your health insurance policy. That will protect you from any major medical expenditures that might arise.
When choosing your HSA, be sure to pick a provider who will allow you to invest the money, not just stick it in a savings account. The much higher average returns you can get from stocks and bonds will help your money to grow far faster than the measly interest offered on a bank savings account. However, it's a good idea to keep part of your HSA balance in cash so that if you need money in a hurry to pay for an unexpected medical expense, you can get at it quickly and easily.
You can make your HSA contributions at any time during the year, but if your goal is to maximize your contributions, it's often easiest to split your annual contribution limit up into monthly installments and set up automatic transfers of the appropriate amount. If you have a self-only HSA, then a monthly contribution of $287.50 would max out your annual limit; holders of family coverage HSAs can contribute up to $575 per month. If that seems like a lot, remember that these contributions aren't just for medical expenses; they're a type of retirement savings as well. And unlike a traditional IRA or 401(k), when you take the money out of your HSA after you turn 65, you won't pay a penny in taxes on your distributions. That makes the HSA a better retirement account than any actual retirement account you can find.