Your HSA money stays with you even if you change jobs or health insurance plans

Quick Summary

  • A health savings account (HSA) lets you set aside pretax income to cover health care costs that your insurance doesn’t pay.
  • You can contribute to an HSA only if you have a high-deductible health plan (HDHP).
  • For 2019, individuals can contribute up to $3,500. For families, it’s $7,000. If you’re age 55 or older, you can add a $1,000 catch-up contribution.

Do you have a high-deductible health plan (HDHP)? If so, you’re probably eligible to contribute to a health savings account (HSA). These tax-advantaged accounts are worth considering. Here’s why.

A Triple Tax Advantage

An HSA account can be better than an IRA because it offers a triple tax advantage:

  1. Your contributions are tax-deductible, so they lower your tax bill. If your contributions are deducted from your paycheck, they’re made with pre-tax dollars.
  2. Withdrawals are tax-free if they’re used to pay for healthcare expenses, including dental and vision care. It’s effectively like getting a discount on your medical bills.
  3. Once you reach age 65 (or you have a disability at any age), nonmedical withdrawals are taxed at your current tax rate. (If you’re 64 or younger, you’ll owe taxes plus a 20% penalty).

With these tax advantages, it makes sense to max out an HSA if you’re able to. And don’t worry about losing the money if you don’t spend it right away. Any money left in the account at the end of the year stays there to pay for future medical expenses. The account—and its funds—are yours even if you change health insurance plans, change jobs, or retire.

HSA Benefits

If your health insurance is through your employer, you may see these benefits:

  • Your healthcare premiums are usually lower with an HDHP.
  • Your payroll taxes will be lower because of your HSA contributions.

No matter where you have your health insurance, an HSA offers several other benefits:

  • The HSA provides you with a way to put more money away for retirement tax-free.
  • You’ll have money to use when you’re older and more likely to need medical care.
  • You can use the HSA to pay for expenses that health insurance and Medicare cover poorly, or don’t pay at all. That includes long-term care, hearing aids, eye care, and dental care.
  • And, of course, you can use the account to pay health expenses now, if you need to.

Contribution Levels

For 2019, the most you can contribute to an HSA is $3,500 for yourself or $7,000 for your family. After you reach age 55, you can contribute an additional $1,000 as a catch-up contribution.

Qualification Rules

You can make HSA contributions only if you’re covered by an HDHP. To count as an HDHP, your health plan must have an annual deductible that’s at least $1,350 for individuals or $2,700 for family coverage.

In addition, your plan’s maximum out-of-pocket costs must be less than $6,750 for individuals or $13,5000 for families. Keep in mind, your premiums don’t count as out-of-pocket costs.

Any health plan that gives you benefits beyond preventive care doesn’t qualify as an HDHP. For example, if your plan provides medical appointments with a co-pay, it won’t qualify as eligible for an HSA.

You must be required to pay all medical costs until you meet your deductible to qualify for an HSA. The one exception is preventive care.

Investing Your HSA Contributions

Another key consideration is how your HSA plan allows you to invest your money. Some plans provided through banks are no more than savings plans, which won’t allow your funds to grow much.

You can find plans that offer more investment alternatives, such as HSABank, which has a TD Ameritrade self-directed brokerage option, or Health Savings Administrators, which includes 400 mutual-fund options for your HSA account. Investment options, of course, become more important if you have a larger HSA balance.

Is an HSA Good for You?

If you already have a qualified HDHP, the answer is a definite yes. If you don’t, consider whether you want to take on the risks of paying for all your medical care until you reach your deductibles. But keep in mind your premiums will likely be lower with an HDHP.

HSAs make the most sense for people who have minimal healthcare costs and want to save for their health needs in retirement. If you want to explore using an HSA, first investigate the type of HDHP plans available and be sure that they match your current health needs.

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