Health Savings Accounts (HSA’s)

Health Savings Accounts (HSA’s)

A Health Savings Account, more commonly known as an HSA, can be a powerful tool. To put it simply, an HSA is a savings account. An individual or a family can deposit money into this account to be used for future health care costs; with one caveat: the funds inside the account can only be used for certain qualified medical expenses, otherwise taxes and penalties may apply.

In order to make contributions into an HSA, you must qualify by being enrolled in a high deductible health plan (HDHP). The qualifications for a HDHP are as follows:

  1. Annual deductible is $1,350 for an individual or $2,700 for a family
  2. Annual out-of-pocket expenses are $6,750 for an individual and $13,500 for a family

If you qualify for an HSA, the contribution limit in 2019 is:

  • $3,500 for an individual
  • $7,000 for a family

For those aged 55 and older, regardless of individual or family, an additional $1,000 “catch-up” contribution is allowed. An HSA provides five major advantages that enable this account to be a powerful tool for many.

Pre-tax/Tax-deductible after-tax contributions
Contributions to an HSA are typically made with pre-tax dollars. These contributions often occur in the form of payroll deductions and as a result are not included in your gross income and are not subject to federal income taxes. Further, these contributions can be state income tax free as well in many states. If your contributions are in the form of after-tax dollars, you have the ability to deduct them from your gross income, thus reducing your taxable income for the year.

Tax-free earnings
Any interest earned or other earnings on the money within this account is tax free.

Tax-free withdrawals
If you withdraw money from your HSA to pay for qualified medical expenses, these withdrawals are not subject to federal taxes. In most states, these withdrawals are not subject to state taxes either.

No Forfeiture
The money deposited into an HSA is not subject to “use it or lose it.” Any unused funds that remain in your HSA can remain invested and are available for future qualified medical expenses, regardless of whether you change health insurance plans, change employers, or retire.

Retirement account after age 65
After attaining age 65, any distribution you take from an HSA will no longer be subject to a penalty, regardless of whether the funds are used for qualified medical expenses. However, after attaining age 65, taxes will still apply to any distribution from an HSA that is not used for qualified medical expenses.

If you qualify, a health savings account can be another great tool to utilize in your personal finances for all the reasons mentioned above. If you have any questions specific to your situation, please do not hesitate to contact us.


Sources: Investopedia(1), Investopedia(2)

*This article is provided for informational purposes only and should not be interpreted as investment advice.