A Health Savings Account (HSA) is a tax-exempt trust or custodial account that helps pay medical expenses. Contributions to HSAs are 100% deductible, just like an IRA. Funds used to pay for qualified medical expenses are tax free, while funds saved in the account grow tax deferred. Unlike a Flexible Spending Account (FSA), funds can continue to grow in a HSA year after year.
The immediate benefit of using a HSA is the fact that it helps lower medical costs for people with high deductible medical insurance plans. The accounts are typically linked to a debit card so that the owner can easily pay medical expenses. HSAs, like IRAs, can also be invested in stock, bonds, mutual funds and ETFS. With medical costs outpacing inflation, this provides a safeguard for savers.
The downside to using a HSA is that withdrawals prior to age 65 are hit with a 20% premature distribution penalty from the IRS. After age 65, there are no penalties for withdraw. Much like an IRA, the distribution will be taxed at the account owner’s ordinary income rate, although funds used for qualified medical payments remains tax free.
While not everyone qualifies for a HSA, those that do can take advantage of the tax deferred growth for retirement. The average couple retiring today will need around $260,000 for medical expenses. Having a HSA will go a long way to help cover those costs. After age 65, the owner could potentially use HSA funds as a supplement to their other retirement savings.
Health Savings Account Eligibility Rules
- Need to be enrolled in a high-deductible health plan with a minimum deductible of $1,300 for an individual or $2,600 for family coverage
- Cannot be claimed as a dependent by anyone
- Cannot currently be enrolled in Medicare
2017 HSA Contribution Limits
- $3,400 per individual
- $6,750 per family
- $1,000 extra if you are 55 and older