HSAs and Tax Savings

Setting aside money in a Health Savings Account (HSA) can help you financially prepare for medical expenses while also taking advantage of significant tax savings. Unlike Flexible Spending Accounts (FSAs), any unused funds in an HSA at the end of the year roll over and remain in your account until you withdraw them. Contributions to your HSA are tax-deductible, or if your employer sets up the HSA, contributions may be made on a pre-tax basis. Additionally, any interest earned on the account is tax-free.

Eligibility for an HSA

You are eligible to set up an HSA if you meet the following criteria:

• You are enrolled in a High Deductible Health Plan (HDHP)
• Your deductible is between $1,300 and $6,550 for individuals or between $2,600 and $13,100 for families
• You do not have other health insurance
• You are not enrolled in Medicare (however, you can still have separate dental, vision, long-term care, disability, or workers’ compensation insurance)

Using Your HSA for Medical Expenses

You can withdraw money from your HSA to cover qualifying medical expenses. Many HSA accounts offer a debit card with a major credit card logo, allowing you to pay for qualifying medical expenses directly, rather than withdrawing funds or waiting for reimbursement. Qualified medical expenses are any medical expense that would qualify as a medical expense deduction on your tax return. Qualified medical expenses include:

• Deductibles, copays, and coinsurance
• Dental treatments and procedures
• Vision care
• Prescriptions

For a full list of qualified expenses, you can visit the IRS website or talk to your accountant for more information on qualified medical expenses. It’s recommended that you save all receipts for any expense that you make HSA withdrawals for and all of your HSA statements in case the IRS ever has a question or audit about your account.

Penalties for Non-Qualified Withdrawals

If you use the money in the HSA account for something other than a qualified expense, you will have to pay taxes on the withdrawals and may also incur a 20% penalty. Once you are 65 years old, you can withdrawal the money without any penalties, but you are still subject to any applicable taxes.

HSAs as a Retirement Tool

Contributing to an HSA now can also be part of your retirement planning. Because you can contribute to the plan until you are 64 ½ and the money can be used at any time regardless of your age, an HSA can be a great way to save for the increased medical expenses that you may incur as you age.

Want to Learn More?

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