HSA – Health Savings Account Information
A Health Savings Account (otherwise known as an HSA) is an account allowing the holder to contribute funds, get a tax deduction on the amount contributed, and withdraw the funds tax free for qualified medical expenses. HSA’s are absolutely wonderful savings vehicles for many reasons, not the least of which is their tax advantaged nature. But to qualify for Health Savings Account, you’ve got to meet certain criteria:
- You must be enrolled in a High Deductible Health Plan (HDHP)
- You cannot have any other health insurance that isn’t a HDHP
- You cannot be enrolled in Medicare or Tricare
- You can’t have received care from the Veteran’s Administration within the last 3 months
- You can’t be eligible to be claimed as a dependent on someone else’s tax return
We’ve provided a handy “cheat sheet” of the rules regarding Health Savings Accounts here:
Here’s all of the health savings account information you need!
HSA’s are triple tax free?
The cool thing that most people don’t realize is an HSA is your only TRIPLE TAX FREE savings account! When you contribute, you get a deduction. The money then grows tax-protected over the years, and finally the money is distributed tax-free if used for medical expenses. Worst case scenario, if you wait until after age 65 you can withdraw the funds for any reason and simply pay your ordinary income tax rate on the distribution.
Since the tax benefits of an HSA plan are so great (better than a ROTH, an IRA, or your 401k at work), you should maximize your HSA whenever possible, and allow the funds to grow as long as possible. This means, even though you have funds in your HSA account, if you can fund your current year medical costs out of other taxable accounts you’re best off doing that than eating into your best long term tax advantaged account.
Generally speaking, though you could withdraw funds after age 65 for any purpose, you’re far better off using the HSA funds for medical expenses to reap the full benefits of triple tax-free! If you pay the taxes on distributions for non-medical expenses, you’re losing a big chunk of the Health Savings Account advantages.
Don’t forget if you distribute funds from your HSA plan prior to age 65, you’re not only taxed, but you’re penalized 10% of the withdrawal. So avoid non-medical distributions at all times, but especially prior to age 65!
For high income tax payers, the HSA becomes even more of a “no-brainer”! The higher your income tax goes, the more the triple tax-free benefits Health Savings Accounts have benefit you.
Where’s the catch with HSA’s?
Sounds good so far right? There are a couple of drawbacks to Health Savings Accounts. The first is they’re not good assets to get caught dead with! By this I mean the account must be distributed and fully taxable upon your death – unlike current laws for ROTH IRA’s, IRA’s, and even workplace retirement plans where assets can be distributed over several years or even the beneficiaries lifetime.
The second is HSA dollars are not protected from creditors. IRA’s have some creditor protection, and your 401k plan at work is creditor protected. Health Savings Accounts are not protected from creditors generally speaking.
The third drawback is they’re hard to qualify for! Health insurance programs are making great strides in creating options which are considered High Deductible Health Plans, but most people don’t have an HDHP. So not everyone can have an HSA, which is very unfortunate.
My HSA gives my family the option to invest in index funds – such as the Vanguard S&P 500 index fund. That’s a pretty neat deal because not only is this a great tax free investment vehicle when used properly, but it can grow with the stock market over long periods of time! Under current law, even if I front my families current medical expenses with taxable dollars, provided I save my receipts I can go back to my HSA plan several years later and withdraw the funds completely tax free after they’ve had time to grow (though it’s entirely possible if not likely the government will take away this provision).
All in all, if you can qualify for an HSA by all means – take advantage of it!