Benefits of a Health Savings Account
December is always a fun and busy time for our family. There is so much to do! Kaimey is busy decorating the house, buying gifts, planning parties and menus, coordinating our holiday travel schedule, and focusing us on a meaningful Christmas. And I am busy doing everyone’s favorite tradition, year-end tax planning! One of my favorite and easiest ways I reduce our taxes is by maxing out our Health Savings Account.
A Health Savings Account (HSA) is a medical savings account that lets you save pre-tax money to spend tax-free on medical expenses. However, not everyone is able to open and use an HSA for their family.
Can I open an HSA?
The government requires you to have a certain kind of health insurance in order to use an HSA. Your health insurance plan needs to be a High-Deductible Health Plan (HDHP). An HDHP is exactly what it sounds like, health insurance that helps pay for your medical costs, but only after you pay a substantial amount of the cost yourself. This is the “high-deductible.” You can read more about what makes a health insurance plan a HDHP here. Since you are paying more out-of-pocket than with traditional health insurance, the government lets you take advantage of an HSA.
How do I open my HSA?
If you get your health insurance through your employer and you are on their HDHP, they likely already have a relationship with an HSA provider. Talk to your HR department to get more information. If you are self-employed or purchase your health insurance outside of your employer, then you get to choose where to open your HSA. This blog post by The White Coat Investor has a good summary of some of your options. Pay attention to which providers just offer an HSA savings account and which providers also let you add an investment account to your HSA.
How do I fund my HSA and get the tax break?
If you open your HSA through your employer it is best to make contributions to your HSA through payroll deductions. In the eyes of the IRS any money you put into your HSA reduces the amount of your taxable income, so you’ll pay less tax! As an additional benefit you also do not pay FICA taxes (Social Security and Medicare taxes) on money saved to your HSA through payroll contributions. And I’ve even heard of some employers that will help make contributions for their employees.
If you are not going through your employer then you can write a check or make an online transfer into your HSA account. You’ll get your tax benefit by listing the contributed amount as an adjustment to your gross income on the front page of your tax return thus reducing your income. Unfortunately in this situation you do not get the benefit of lower FICA taxes. Note that anyone can contribute to your HSA for you. Are you having a hard time coming up with your Christmas wish list to give your family? Ask them to make a contribution to your HSA for you!
For 2018, you can contribute up to $6,900 to your family plan HSA, or $3,450 to your individual plan HSA. After age 55 you are allowed to make an additional $1,000 per year catch-up contribution. Once you enroll in Medicare (generally age 65) however you can no longer make contributions, but you do get to keep your account.
How do I use my HSA to pay for medical expenses?
Many HSAs will issue you a debit card that you can use to pay medical expenses directly from your account. Since you put pre-tax money into the account you are now using pre-tax money to pay for your medical expenses. If you do not use the debit card option, you simply self-pay the medical expense and then reimburse yourself from your HSA later. In fact, there are no rules on when you reimburse yourself. You can reimburse yourself the same day as the expense, or I like to self-pay throughout the year, keep up with my medical receipts, and then claim my “reimbursement” at Christmas to help pay for presents!
Remember that with an HDHP you will be paying more for doctor visits and prescriptions than you would under traditional health insurance. This is because of the higher deductibles. You are also generally paying lower monthly premiums because of this. And typically with HDHPs your preventative visits (like your annual physical) are fully covered with no deductible required.
In order to not owe taxes (and a 20% penalty) on the money coming out of your HSA, you have to use it for “qualified medical expenses.” These are explained in detail in IRS Publication 502, “What Medical Expenses Are Includible?”, but generally the HSA can pay for doctor visits, prescription medications, hospital stays, etc. You generally cannot use the account to pay for cosmetic procedures or over-the-counter drugs.
What if I don’t use all of the money I put into my HSA this year?
That’s okay! Unlike some other types of medical savings account, you do not lose any money that remains in your HSA. You can keep it there for future year’s expenses. You even get to keep the account if you leave your employer. And if you still have money in your account after age 65, you can treat the account like a traditional IRA and just pay income taxes on the amount you take out for non-medical reasons.
Is an HSA a good option for me?
If you are generally healthy and only use your health insurance for annual exams, an HDHP with an HSA could be a great option for you! If you want to lower your taxes by saving pre-tax money but your income is too high to use a traditional IRA, an HSA could be a great option for you! There are so many more details that I could not include in this blog post. If you have questions about HSAs, and want to know if it could be a good option for you, reach out to me! I’d love to learn about your situation and walk you through this decision.
Disclaimer: This article is general information on Health Savings Accounts. It is not meant to be specific advice to your unique situation. Any tax discussion above is also not meant to be specific to your unique situation. The tax laws are complicated, and I did not discuss every one-off situation that may affect you. You should always seek the advice of a tax professional before making any big tax decisions yourself. Also, many of the numbers above are 2018 limits. Most of these numbers are increasing slightly for 2019.
For 50 pages of additional thrilling information on HSAs, go directly to IRS Publication 969.
