Health Savings Accounts (HSAs) can be a great way to plan for medical expenses and offer a creative solution to defer additional pretax income.
- HSAs are available to anyone who is currently participating in a high deductible health insurance plan. For the year 2020, a high deductible health insurance plan is defined as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. The policy must also have total annual out of pocket maximums of less than $6,900 for an individual and $13,800 for a family.
- The HSA is a pre-tax savings vehicle mainly used for paying for medical expenses. You can defer up to $3,550 for an individual or $7,100 for a family and receive a tax deduction in the year of the contribution. If you are over age 55, you can add an additional $1,000 per year. Funds can then be pulled from the HSA at any time to pay for medical expenses, tax-free. In summary, contributions are pre-tax, funds grow tax-deferred in the account, and withdrawals for qualified medical expenses are tax-free. The medical expense does not have to be incurred in the year you are pulling funds out. You can save the receipt and withdrawal the funds at any time in the future to reimburse yourself.
- If you do not use the funds before age 65, you can then pull the funds out for any expense, and the withdrawal will be taxed, but there will be no IRS penalty. The account essentially turns into a Traditional IRA at that time, but unlike other Traditional IRAs, you will not have to pull a required minimum distribution when you reach age 72.