5 Facts About Health Savings Accounts

Want to learn more about Health Savings Accounts? Read on below:

1) No “Use or Lose”

You may be used to a Flexible Spending Account (FSA), where you make tax free contributions to an account – but you must use those contributions by year end or your money is lost. Not with an HSA!

Health Savings Accounts can be kept in the account indefinitely. And because contributions in an HSA can be invested, this gives you the opportunity to save your savings actually compound, possibly over decades.


We have seen the power of Compounding Interest in many examples here on Begin To Invest. And as we are about to see, for those who qualify for an HSA, this is just one more vehicle that is available to help shelter your savings from taxes and allow for tax deferred growth.


From the Source: IRS Publication 969, page 2:

‘The contributions remain in your account until you use


2) Triple Tax Efficiency


Not only are your contributions to an HSA tax deductible, and not only is your savings in your HSA able to grow tax deferred, but withdrawals can also be taken out tax free if they are used to pay for qualified medical expenses.

Technically, this makes an HSA an even better savings vehicle than 401(k)s and IRAs, which only offer tax deductible contributions and tax deferred growth.


From the Source: IRS Publication 969, page 2:


  • “You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.

  • The interest or other earnings on the assets in the account are tax free.
  • Distributions may be tax free if you pay qualified medical expenses.”


3) Family Members or Others May Contribute to Your HSA

The magic of an HSA is when your contributions can be given time to compound. This means getting the most money in your HSA as early as possible is vital.

Parents, want to help get your children off on the right foot? You can’t contribute to their 401(k)s, but you can contribute to their HSA, providing them a backstop should they need medical treatment, but also potentially giving them a gift that will be able to grow over time into something much more significant.


From the Source: IRS Publication 969, page 4:

“Any eligible individual can contribute to an HSA. For an
employee’s HSA, the employee, the employee’s em-
ployer, or both may contribute to the employee’s HSA in
the same year. For an HSA established by a self-em-
ployed (or unemployed) individual, the individual can con-
tribute. Family members or any other person may also
make contributions on behalf of an eligible individual.”


4) Your HSA Can Be Used for a Dependent

There is a little flexibility in how you can make qualified distributions from your HSA. Not only can the money in your HSA be used for you and your spouse, but withdrawals can be made tax free for qualified medical expenses incurred by your dependents as well.


From the Source: IRS Publication 969, page 13:

Qualified medical expenses are those incurred by the following persons.
1. You and your spouse.
2. All dependents you claim on your tax return.


5) You Can Withdrawal From Your HSA After Age 65 With No Penalty

If you are healthy and lucky enough to be able to let some of your annual contributions grow and compound over decades until you reach the age of 65, the money in your account can now be used for anything and can be withdrawn penalty free. Leave it in and fund medical expenses, or treat the distributions from it just like you would an IRA.


From the Source: IRS Publication 969, Page 9:


“There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.”


Medical expenses have become a major issue in the U.S.. Costs are rising, and many have trouble making ends meet. Funding an HSA early, and giving it time to grow allows you to be prepared for when you inevitably incur medical expenses as you age.

Obviously high deducible health care plans are not for everyone. To truly make HSAs worth it, you must be disciplined and contribute each year. You must also be able to pay your plans maximum deductible should you get sick or hurt. But for those who would not be burdened by meeting the plan’s maximum annual deductible, a HSA is one of the best, most tax efficient ways to save money. If you are required to use it for medical expenses, at least the money contributed to the account was tax deductible and received tax free growth. But if you are lucky enough to remain healthy and can let your contributions grow, HSA can act as a second, or third retirement account, and one of the best ones at that!
A few other general facts about HSAs (As of 2016):
– Maximum annual contributions to HSAs are $3,350 for individuals, $6,650 for those with a family plan.
– Maximum deductibles for HSA plans are $6,550 for individuals, $13,100 for those on a family plan.
For more reading see:
IRS Publication 969: https://www.irs.gov/pub/irs-pdf/p969.pdf
And for an explanation of qualified medical expenses, check out IRS Publication 502: https://www.irs.gov/pub/irs-pdf/p502.pdf

Categories: Investing and Retirement

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