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A Health Savings Account, with its potential triple tax benefits, can be a powerful way to save for healthcare-related expenses in retirement. Who can open an account, and what are the qualifications? Find the answers to your HSA questions below.
1. What is a Health Savings Account (HSA)?
An HSA is like an IRA for health care expenses. It allows you to control costs by reducing health insurance premiums and putting money into an account to pay for current and future health care expenses. Contributions can be made to the account annually with pre-tax dollars, subject to limitations, much like contributions to IRAs. Contributions and earnings in the account can be withdrawn to pay for qualified medical expenses at any time without tax consequence.
2. Can anyone set up a Health Savings Account?
HSAs have eligibility rules. To be eligible for an HSA, you must:
- Be covered by a High Deductible Health Plan (HDHP)
- Not be covered by any other health insurance
- Not be entitled to Medicare benefits
- Not be claimed as a dependent on another person’s tax return.
There are some qualifications. If you are covered by an HDHP, but have insurance policies that cover specific injuries or diseases, you are not disqualified. The same is true of Accidental Death and Disability coverage, long-term care coverage, dental care plans, and vision plans.
3. What is a High Deductible Health Plan?
An HDHP has been defined by the IRS as a health plan with a minimum deductible of $1,400 for an individual plan and $2,800 for family coverage. An HDHP must also have out-of-pocket expenses, like deductibles and co-pays, which don’t exceed $6,900 for individual plans or $13,800 for family coverage in 2020 ($7,000 and $14,000, respectively, in 2021). Out-of-pocket expenses can be higher for services that are provided outside the plan network.
4. How much can I contribute to my account?
If you have a self-only account, you may contribute up to $3,550 to an HSA in 2020 ($3,600 in 2021). If you have a family plan, you may contribute up to $7,100 in 2020; $7,200 in 2021. A catch-up provision allows account holders age 55 to 65 to contribute an additional $1,000 per year.
Video: Self-Directed HSA FAQ
5. What do you mean by a “self-directed” HSA?
Funds in a self-directed HSA can be invested in the same manner as other self-directed retirement accounts – meaning you’re not limited to stocks, bonds, and mutual funds. Returns on the investments are added to the account and accumulate tax-free.
Returns are not considered contributions and don’t count toward the contribution limits.
6. What happens when funds are withdrawn from the account?
Funds can be withdrawn, tax-free, from an HSA at any time as long as they are used to pay qualified medical expenses. If used for any purpose other than qualified medical expenses, those funds are subject to a 10-percent penalty and are taxed at ordinary income tax rates for account holders under the age of 65.
If you are over the age of 65, funds withdrawn and used for purposes other than qualified medical expenses are taxed at ordinary income tax rates, but aren’t subject to the 10-percent penalty.
6. What costs are considered qualified medical expenses?
The IRS defines qualified medical expenses as medicine, doctor’s visits, diagnostic and treatment services, long-term care and some health care insurance premiums. For a complete list and additional information, please see IRS Publication 502.
7. Whose responsibility is it to ensure that HSA distributions are actually used to pay qualified medical expenses?
It’s your sole responsibility as the account holder. It’s not the obligation of the account custodian.