Health Savings Account – Should You Consider Opening One?
Health Savings Accounts, commonly referred to as HSAs, are a lot like personal savings accounts except the money you put into them is used to pay for “qualified medical expenses.”
In order to be eligible to open and contribute to an HSA, your health insurance plan must be considered a “high deductible health plan”. Your health insurance plan is considered a high deductible plan if:
- Your 2019 self-only insurance plan has a deductible of $1,350 or more.
- Your 2019 family insurance plan has a deductible of $2,700.
- Your 2019 self-only insurance plan has a maximum out-of-pocket of $6,750.
- Your 2019 family insurance plan has a maximum out-of-pocket of $13,500.
While these health insurance plans have high deductibles, monthly premiums are typically much less than for health insurance plans with lower deductibles, which makes them appeal to people trying to minimize up-front costs associated with health care. In addition to the above eligibility requirements, there are other federal guidelines that you must meet in order to be eligible to open and contribute to an HSA. You must:
- Not be enrolled in Medicare.
- Not be claimed as a dependent on someone else’s tax return.
HSA Contribution Limits for 2019
The maximum contributions that you can make to an HSA for 2019 are:
- $3,500 for self-only health insurance plans.
- $7,000 for family health insurance plans.
- If you are age 55 or older, you can make an additional “catch-up” contribution of up to $1,000.
“Triple” Tax Benefit with Health Savings Accounts
One of the greatest benefits of HSAs is that they provide a taxpayer with a “triple” tax benefit.
- HSA Contributions are pre-tax/tax-deductible.
- The money inside the HSA grows tax-free.
- The money can come out of the HSA tax-free as long as it is used for “qualified” medical expenses.
This means your contributions are made before your income is taxed, you don’t pay taxes on the account growth, and if you make withdrawals for eligible expenses, you don’t pay tax on these withdrawals either.
Advantages of an HSA
Health Savings Accounts offer a great way to save for – and pay for – healthcare expenses. Here are some of the advantages to having a Health Savings Account:
- Tax-deductible contributions. Contributions made with after-tax dollars can be deducted from your gross income on your tax return, which means you may owe less tax at the end of the year.
- Earnings grow tax-free. Any interest or other earnings on the assets in the account are tax-free.
- Tax-free withdrawals. Withdrawals from your HSA are not subject to federal (or in most cases, state) income taxes if they are used for qualified medical expenses.
- Pre-tax contributions. Contributions made through payroll deposits (through your employer) are typically made with pre-tax dollars, which means they are not subject to federal income taxes. In most states, contributions are not subject to state income taxes either. Your employer can also make contributions on your behalf, and the contribution is not included in your gross income.
- Others can contribute to your HSA. Contributions can come from various sources, including you, your employer, a relative and anyone else who wants to add to your HSA.
- Funds roll over. If you have money left in your HSA at the end of the year, it rolls over to the next year.
- The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, change employers or retire. Funds left in your account continue to grow tax-free.
- Most HSAs issue a debit card, so you can pay for your prescription medication and other expenses right away.
Disadvantages of an HSA
Health Savings Accounts also have some disadvantages:
- High-deductible requirement. Even though you are paying less in premiums each month, it can be difficult – even with money in an HSA – to come up with the cash to meet a high deductible.
- Taxes and penalties. If you withdraw funds for non-qualified expenses before you turn age 65, you’ll owe taxes on the money withdrawn from your HSA, plus a 20% penalty. After age 65, you’ll owe taxes but not the penalty.
- You have to keep your receipts to prove that withdrawals were used for qualified medical expenses.
A Health Savings Account can be a great option for people who wish to limit their upfront healthcare costs while saving for future expenses. HSAs require you to have a High-Deductible Health Plan (HDHP), so monthly premiums are generally significantly less than if you had a low-deductible health plan. In addition, favorable tax treatment means you may owe less in taxes on your income tax return. However, HSAs may not be ideal for everyone. If having a high-deductible health plan seems too risky for you – or if you anticipate having significant healthcare expenses – a plan with a lower deductible and lower co-pays might make more sense. Before making any decisions, a complete analysis of your personal situation needs to be made.
How DHJJ Financial Advisors Can Help
DHJJ Financial Advisors is a Registered Investment Advisory Firm that has been providing asset management and financial planning services to its clients since 1988. For over 30 years, our team of dedicated investment advisers has worked closely with our clients to produce unique investment portfolios designed to meet their personalized needs. DHJJ Financial Advisors is affiliated with DHJJ Certified Public Accountants and Business Advisors. If you have any questions or you are thinking about switching to a high-deductible health plan and opening a health savings account, please contact any of the financial advisors at DHJJ Financial Advisors at 630-420-1360 or fill out the form below.