Health Savings Accounts

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Health savings accounts (HSAs) are a great way to save for future healthcare costs. Healthcare is a huge cost looming for most retirees, and HSAs, for those who are eligible can help prepare.

Many people are not eligible for HSAs. There are stringent requirements. To be eligible, you must:

  • be covered under a high deductible health plan
  • have no other comprehensive health coverage
  • not be enrolled in Medicare.
  • not be claimed as a dependent on someone else’s tax return.

A high deductible health plan is one with higher deductibles than typical health plans. In 2015, the minimum deductibles are $1,300 for an individual or $2,600 for a family.

But if you are eligible, you can open and invest in an HSA. It gives you the same benefits as other retirement accounts like an IRA and 401(k).

  • your investments are tax-deductible (like a traditional IRA)
  • your investments grow tax-free (like a Roth IRA)
  • you can receive distributions tax-free (like a Roth IRA) as long as they are used for qualified medical expenses

HSA contributions

You can contribute up to the annual limit each year to your HSA. In 2015 the limit was $3,350 if you have individual coverage or $6,650 if you have family coverage. If you’re 55 or over you can contribute an additional $1,000 anytime during the year. You can contribute to your HSA up to April 15 of the following year, just like an IRA.

After you enroll in Medicare, you can no longer contribute to an HSA. For most people this happens at age 65, but many people continue working and delay enrolling in Medicare because they have health coverage through their employer.

If you were previously eligible for an HSA and are no longer, you can’t make further contributions but you can still use the distributions from an HSA you’ve created for qualified medical expenses without penalty.

HSA distributions

You can use HSA distributions for out-of-pocket medical expenses including as your deductible, co-payments for medical treatment and prescription drugs, Medicare Part D and Medicare Advantage premiums (but not medigap premiums), and bills not covered by insurance, such as vision and dental care. You can also take distributions to make up for what Social Security withholds from your check to pay Medicare Part B. You may also use funds to cover a portion of long-term-care premiums based on your age ($3,800 per year if age 61 to 70, and $4,750 if older than 70 in 2015).

You can also use HSA funds for non-medical expenses, but the distributions will be subject to income tax and may be subject to an additional 20% tax.

You do not have to take distributions from your HSA each year. Unlike a flexible savings account you might have through your employer, the funds in your HSA do not expire. You don’t have to use the funds if you don’t want to, and unused funds remain in your account and can grow, just like an IRA.

Speaking of growth, you often have a choice as to where you invest the funds in your HSA. You can keep it in money market funds. Alternatively, depending on the provider you choose to keep your HSA, you may be able to invest your money in mutual funds, stocks, and other investments.

You can find HSA providers online using the links below. There are many choices, and your best option depends on how you plan to use the account. If you plan to use the funds soon, then a provider with savings accounts and a debit card or other easy way to access the funds might be your best option. If you plan to leave the funds for a while, then a provider that lets you invest in stocks or mutual funds might be most suitable. You can switch to a different provider by transferring the funds, similar to an IRA rollover.

For more information

For more detailed information about HSAs, visit the HSA Center.

For a general overview of HSAs, see this article by Kiplinger’s.

For tax implications of HSAs and other health accounts, see IRS publication 969.