Health savings accounts don't have the following that retirement accounts have, but used properly, they offer tax breaks that surpass what even an IRA or a 401(k) account can provide. Moreover, given the need to save money toward six-figure healthcare expenses in retirement, one could argue that an HSA really is a tax-favored retirement account.
Not everyone can use an HSA, because the accounts are only available to those who have a particular type of healthcare coverage. Nevertheless, it's worth checking your health insurance policy to see if it lets you use an HSA, or if you can switch to another policy that does. Below, you'll find four key facts about health savings accounts that you need to know to make a smart decision about using them.
1. Why HSA tax breaks can't be beaten
With most tax-favored accounts, you have to make a choice between two primary tax benefits. Some accounts, such as a traditional IRA, let you get an upfront deduction for the money that you set aside toward retirement. In exchange, though, you have to pay tax on traditional IRA withdrawals when you take money out after you retire. Conversely, other accounts, such as Roth IRAs, let you take out money tax-free in retirement, but you don't get any upfront deduction when you contribute.
Health savings accounts give you both of these favorable tax treatments in one package. Not only do you get to deduct your contributions, but you also get to treat withdrawals as being tax-free -- as long as you use them toward paying qualifying healthcare expenses.
Those who have HSAs as a workplace benefit can sometimes get even better treatment under an HSA. Some employers make their own contributions to HSAs, and again, as long as you spend that money on healthcare, there aren't any tax consequences.
2. High-deductible health plans and HSAs
Only those who have high-deductible health plans are allowed to open health savings accounts. In order for a health insurance policy to comply with HSA rules, it needs to have certain deductibles and out-of-pocket maximums. For 2019, here are the limits:
- Deductibles must be at least $1,350 for self-only insurance policies, or $2,700 for policies offering family coverage.
- Maximum out-of-pocket amounts are $6,750 for self-only coverage, or $13,500 for family coverage.
It's possible to have some limited supplemental insurance policies in specialized areas, such as dental or vision coverage, without jeopardizing your HSA status. However, if your health plan has lower deductibles or out-of-pocket maximums than the standards above, then you won't be able to use an HSA.
3. HSA contribution limits are on the rise
For 2019, the maximum contribution amounts for HSAs are on the rise. Most people can put up to $3,500 into an HSA if they have coverage only for themselves individually, or $7,000 for a policy offering family coverage. Those numbers are up $50 and $100, respectively, from their corresponding 2018 limits.
If you're 55 or older, you also get to make a catch-up contribution if you want. That boosts the total permitted contribution by $1,000, taking it up to $4,500 or $8,000, depending on whether your policy covers just yourself or also includes your whole family.
Like IRAs, you have a few extra months to contribute to an HSA for a given tax year. The deadline for 2018 HSA contributions is April 15, though, so you don't have much more time to get moving.
4. You can use HSA funds for a lot of purposes -- or keep them for future years
The IRS is pretty lenient about what you can use HSA money for. Basic medical services on either an inpatient or outpatient basis are generally permitted, as are prescription drugs, medical equipment, and just about any other expense that would qualify for the medical expense deduction elsewhere under the tax laws. You can use HSA money for your own healthcare or for those of a spouse, child, or other dependents.
Unlike some savings vehicles for medical expenses, you don't have to forfeit your HSA money if you don't use it each year. Instead, HSA money carries forward year after year, and you can name a specified beneficiary to inherit the account if you don't use it up before you die.
Take a closer look at HSAs
A health savings account is a great way to save, with many hidden benefits that few people know about. You might not qualify, but if you do, you won't want to miss the opportunities HSAs offer.