In the midst of the confusion and concern brought on by implementation of the Affordable Care Act, one health-related financial tool stands out as a bright spot: the health savings account (HSA). Those eligible for such an account receive three levels of valuable tax benefits: contributions are tax deductible, the money grows on at least a tax-deferred basis, and any money withdrawn to pay for qualified medical expenses comes out tax-free.
Since account balances can be carried forward from year to year (unlike flexible spending accounts, which have an annual “use-it-or-lose-it” provision), HSAs can be helpful in saving not just for today’s healthcare costs but for later life healthcare expenses as well. For some, an HSA can even be used as a powerful additional retirement savings account with unusually generous tax benefits.
The ABCs of HSAs
Health savings accounts are for people with a high-deductible health plan (HDHP). To qualify, an individual’s plan must have an annual deductible of at least $1,250 (All figures are for 2014.); a family’s plan must have an annual deductible of $2,500 or more. (HSAs have no restrictions or phaseouts related to a taxpayer’s income level.)
If your plan meets those requirements, you are eligible to make tax-deductible annual contributions of up to $3,300 for individuals or $6,550 for families. Those over 55 can add an additional $1,000 per year. This money may be used to pay for deductibles, co-pays, prescription drugs, eye care, dental care, and even health-insurance premiums if you are unemployed or paying for “COBRA” continuation coverage through a former employer.
HSA funds also may be used to pay a portion of premium costs for most long-term care policies. The amount you’re allowed to use each year for this purpose depends of your age—it ranges from $370 if you’re 40 or younger to $4,660 if you’re 71 or older. (See IRS Publication 502 for more details.)
Where to Open an HSA
Certain banks, credit unions, health-insurance providers, and even some mutual funds (including the SMI funds) offer HSAs.
Such HSA “custodians” vary widely in the benefits they offer and the fees they charge. Some offer only the ability to save; others allow you to invest. Some pay very little interest on savings; others pay more. Some charge monthly or annual fees; others charge nothing. Some make it easy to access the money to pay for healthcare expenses via a debit card; others are designed strictly as long-term savings vehicles. Several web sites, such as HSAsearch.com,monitor much of the HSA landscape, listing providers along with fees and account features.
Source: Crosswalk | Matt Bell, SoundMindInvesting.com