Health savings accounts (HSAs) aren't as popular as IRAs or 401(k) accounts, but they can play an equally important role in your long-term finances. With most people spending upward of $200,000 on medical expenses in retirement, HSAs offer a huge array of potential tax advantages that even IRAs can't match.
Unfortunately, HSAs aren't available to everyone. To qualify, you have to use specialized types of health insurance coverage, and those options have been limited to some extent under the coverage mandates of the Affordable Care Act. Below are some key aspects of HSAs that you'll need to keep in mind for 2018.
The basics of HSAs
Congress has a habit of creating new types of tax-favored accounts for different purposes, and the health savings account is the version that's intended to help with medical expenses. HSAs let you make contributions on a tax-deductible basis, while the returns that your contributions earn in interest, dividends, and capital gains aren't subject to tax within the account. If the money eventually goes toward qualifying health expenses, then distributions are tax-free. That gives you the best of both worlds in that you get both the upfront deduction and tax-free treatment when you use the money. That's not available with any type of IRA for retirement.
There are added advantages to health savings accounts. If you have an HSA through an employer plan, some employers add contributions of their own to your account. Moreover, you never have to forfeit HSA money. If you don't use your money by the end of the year, you can simply carry it forward to future years -- with no limits and no risk of forfeiture.
The key requirement for HSAs
If you want an HSA, you're required to have a qualifying high-deductible health plan to go with it. For 2018, HSA-compliant insurance policies must have deductibles of at least $1,350 for an individual policy or $2,700 for a family policy. Maximum out-of-pocket expenses under a qualifying high-deductible health policy must be $6,650 for individual policies or $13,300 for family coverage.
Those who are covered both by a high-deductible policy and by another more comprehensive health plan can't simply use their HDHP to shoehorn their way into an HSA. In some limited cases, additional coverage from supplemental-style insurance policies that cover only highly specialized areas like dental or vision services won't disqualify you for HSA eligibility, but it's important to check closely before making any assumptions.
What are the 2018 HSA contribution limits?
The limits for HSAs in 2018 depend on what type of policy coverage you have. If you're younger than age 55 and have an individual policy, the limit for 2018 is $3,450. Family policies offer a maximum deduction of double that amount, or $6,850. Those who are 55 or older can add $1,000 more to the corresponding number that applies to their situation.
For a contribution to apply to a certain tax year, you have to make it before the tax filing deadline for that year. That means you have until April 17 to make a 2017 HSA contribution, while still being eligible to add further savings for 2018 at the same time.
How HSA funds can get used
Most common medical services will qualify for use of HSA money. If you need basic medical services either on an inpatient or outpatient basis, you can use HSA money and get full tax benefits from doing so. Prescription drugs, medical equipment, and other expenses that typically qualify for the medical expense deduction elsewhere under the tax laws also typically qualify. HSA money can go toward qualifying medical expenses for a spouse, as well as dependents.
If you don't use all your HSA money, the beneficiary you name will inherit the remaining funds after your death. If the person receiving the HSA is your surviving spouse, then the inherited HSA can get treated as if your spouse had always owned it. Non-spouses must withdraw money from the account and pay tax on it in the year in which you pass away.
Be smart with HSAs
If you haven't looked into health savings accounts, they're worth taking some time to get to know. Not everyone will be able to use them effectively, but those who can will have an opportunity to save thousands in taxes as a result.